ASPEN, Colo. (Reuters Breakingviews) - Goldman Sachs is playing follow-someone-else’s leader. The $87 billion Wall Street firm is expected to announce early this week a career investment banker as its next chief executive. David Solomon comes from the side of Goldman that advises clients rather than the bit that trades securities and produced current chief Lloyd Blankfein. It further de-emphasizes the role that part of the business plays. It’s also something Morgan Stanley did almost a decade ago.
Market making used to be the firm’s powerhouse. But it’s driven by clients’ whims. When they’re not in the mood, or the market doesn’t cooperate, it suffers. Goldman’s unit is also more skewed than rivals to hedge funds and other investors.
This time last year, Goldman reported a 40 percent drop in fixed-income trading as it suffered its worst quarter for commodities trading on record. In September executives put a plan in place to fix the division’s troubles. This year’s second-quarter results, due on Tuesday, will show how well that’s working.
Trading, though, made up just $1 billion of the $5 billion in new revenue initiatives Blankfein and his lieutenants unveiled. The rest is tied to earnings streams that the bank can either control more effectively, or that are more predictable - like advising on deals, collecting commissions, and retail banking in its Marcus outfit.
Goldman is a bit slow on the uptake here. These less capricious businesses have been surprisingly stable even as market-making revenue has fallen and Goldman’s own investment bets have flopped around. But they haven’t really grown, sticking at or below $20 billion on a rolling 12-month basis since the financial crisis, based on a Breakingviews analysis. Trading and investments, meanwhile, fell from the majority of the top line to around 41 percent.
Morgan Stanley started 10 years ago to play down what was an admittedly weaker fixed-income trading franchise. It expanded its wealth-management business and soon promoted its boss, James Gorman, to be CEO. He talks up the benefit of stable revenue and says he wants to ensure his firm does fine in bad times. He has made its smaller bond- and currency-trading unit more profitable – and last week promoted its architect, Ted Pick, to run the entire investment bank, thus making him a candidate for the top job.
Solomon, who moonlights as DJ D-Sol and extols the benefits of a healthy work-life balance, isn’t just a Gorman do-over. Goldman’s bigger M&A franchise sets it apart from its rival, and the firm is much lighter on wealth management. Goldman will always be different, but Solomon’s tune is one bank investors should find pleasingly familiar.
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