Inside Wall Street’s Most Enduring RivalryMichael J. Moore
One grew up in Brooklyn public housing, the son of a postal worker, and shared a bedroom with his grandmother. The other was born half a world away, in Australia, the son of an engineer and the sixth of 10 children in a comfortable Melbourne household.
One was a tax attorney who became a precious metals salesman. The other spent years at McKinsey & Co. before going into banking. One is short, bearded, and has a joke for every occasion. The other is tall, cleanshaven, and matter-of-fact.
They are Lloyd Blankfein and James Gorman, and they run the only surviving stand-alone investment banks in the U.S. -- Goldman Sachs Group Inc. and Morgan Stanley. They’re as different in appearance, personality, and style as the antipodes that mark their birth. And, while they still compete in many businesses, they’re steering their firms in opposite directions.
Gorman, 56, chief executive officer of Morgan Stanley, has put his chips on his bank’s retail brokerage. Blankfein, the 60-year-old CEO of Goldman Sachs, is betting the trading business that dominated Wall Street before the financial crisis will flourish again with fewer competitors around to enjoy the results.
For all their history, the firms are embodiments of their current leaders’ visions. Gorman, in the middle of his sixth year as CEO, pushed for a get-big-or-get-out strategy in wealth management even before he rose to the top and seized a chance to buy Smith Barney from Citigroup during the financial crisis. Blankfein, who’s starting his 10th year in command and had opportunities to change Goldman Sachs’s course, decided he liked the businesses he had.
“There’s always been, in the recent period of time, some controversy over business models,” Blankfein told a business school audience in South Africa in April. In the past, many of the largest firms “you could have put into buckets. Now, everyone is almost a category of one.”
Even as trading languished across the industry in recent years, Goldman Sachs has outperformed Morgan Stanley by most financial measures. Its return on equity of 11.2 percent last year was twice as high, and it produced more revenue with 40 percent fewer employees. That’s led to a pay gap: Blankfein was awarded $126.6 million over the past five years, while Gorman received $74.8 million.
Still, investors have latched onto Morgan Stanley’s turnaround story, pushing its shares to greater gains than Goldman Sachs’s in back-to-back years for the first time since Goldman Sachs went public in 1999.
“People find Morgan Stanley really attractive because there is this transformation in place,” says Steven Chubak, an analyst at Nomura Holdings Inc. in New York. “The bull thesis on Goldman Sachs is that if anyone can adapt well to the current challenges, it’s going to be Goldman, because they have a proven track record of doing that time and time again.”
The differences between the two firms can best be seen in what each one has that the other lacks.
Morgan Stanley’s retail brokerage stretches from an office in Bangor, Maine, to one in Anchorage, Alaska, and serves 4 million customers who on average have about $500,000 with the firm. With 16,000 advisers, it has brought in $9.6 billion in pretax profit in the past five years without posting a losing quarter, has a 20 percent margin, and requires only $5 billion of regulatory capital. It’s a good fit with new banking rules.
For Goldman Sachs, the comparable money-making engine is the business that houses the firm’s investments. It’s largely composed of loans, stakes in its own private equity and hedge funds, and a secretive principal-investing team called the special situations group.
The human requirement is small, accounting for fewer than 10 percent of the company’s partners, but the investments, which include everything from distressed loans bought from European banks to a stake in an Israeli company that makes software for self-driving cars, have earned $15.2 billion in pretax profit during the past five years on a margin of more than 50 percent.
The segment requires more than $15 billion in regulatory capital, based on disclosures of risk-weighted assets, and posted a $2.6 billion loss in one quarter. New rules are forcing the bank to cut stakes in its own funds and decide whether it wants to replace them with direct investments.
The banks still compete in almost all of their businesses, whether it’s to win an initial public offering from a tech company, woo a hedge fund to their prime brokerage, or outbid the other on an oil trade. There’s plenty of sniping, too.
When Facebook Inc.’s Morgan Stanley–led 2012 IPO went poorly -- marred by a delayed opening and a 31 percent share price drop in the first three weeks of trading -- some Goldman Sachs bankers whispered that Morgan Stanley would lose customers. Some Morgan Stanley bankers countered that Goldman Sachs, which also worked on the deal, backed away from Facebook when things went south.
Even in businesses where they overlap and compete, the firms have taken different paths. Goldman Sachs remains committed to its commodities division despite regulatory scrutiny, while Morgan Stanley has made an effort to sell oil and gas units. Morgan Stanley sought to cut the amount of capital needed in its rates-trading business, and last year reduced the notional amount of related derivatives by almost one-fifth, to $31 trillion. Goldman Sachs, which is bigger in rates, increased the notional value of those derivatives by $3 trillion to $47 trillion.
Last year, Blankfein found himself onstage addressing an unusual audience: Morgan Stanley brokers. Goldman Sachs was pitching a new fund that invested in master limited partnerships, tax-exempt companies that own energy assets such as pipelines. Morgan Stanley was leading the syndicate handling the roadshow. Greg Fleming, president of Morgan Stanley’s wealth management division, was interviewing Blankfein to show that the fund was the right product for clients.
“I’ve been at the firm long enough to remember the days when Morgan Stanley and Goldman Sachs were the Hatfields and McCoys, and you’d never think of them cooperating on anything,” says Timothy O’Neill, co-head of investment management at Goldman Sachs. “But we’re great partners in wealth management now.”
The banks’ strategies are reflections of men with different personalities, philosophies, and histories. Gorman went to a Catholic boarding school in Melbourne. Blankfein grew up in a Jewish neighborhood in Brooklyn and attended a public high school where violence sometimes forced him to stay on the bus until it looped back home.
Gorman always held strategic roles, advising Merrill Lynch & Co. as a McKinsey consultant before jumping to the Wall Street firm as head of marketing. Blankfein was a currency salesman in the middle of the trading floor and later ran his own book to gain the respect of the traders he oversaw.
Blankfein rose to power in part because of the fixed-income trading profits in the years before the financial crisis. Gorman’s ascension was aided by losses on bond-trading desks when markets collapsed in 2008.
Gorman’s strategy is driven by a belief that the success of all businesses ultimately comes down to execution. He’s a disciple of stated goals, strategic updates, and marked-to-market checklists. He writes his firm’s results by hand every night at his Upper East Side home and keeps a list of 10 priorities in a clear folder on his desk at work, checking them off in red ink as they’re accomplished. He asks deputies if new ideas fit with the firm’s mission statement and doesn’t hide it if he disagrees, colleagues say. He takes time making decisions, but once he puts someone in place, he rarely micromanages.
“Each year I try to focus on about 10 priorities that I personally will get involved with,” Gorman said after the firm’s annual meeting in May. “The organization is full of very talented people, and it’s going to do just fine with or without me sitting here. So there are certain things I can move the needle on.”
Morgan Stanley has targets for everything -- return on equity, assets under management, risk-weighted assets, compensation ratios, and fee-based flows, to name a few. The bank doesn’t always meet those goals. Still, it has won plaudits from investors. Morgan Stanley traded at a multiple of 20 times its earnings over the 12 months ended in March, the highest of any major U.S. bank.
Goldman Sachs doesn’t have a single firmwide target. The bank has resisted calls for an ROE goal and has dismissed the notion that benchmarks in its executive-pay packages represent a target. Blankfein, humbled by decades in the financial markets he calls the “sentiment business,” might hesitate to predict what he’ll have for lunch. Calls for forecasts are met with some version of “I will have a very clear answer in hindsight.” He prizes flexibility and speaks often of his firm’s need to be nimble. Any stated targets may reduce its ability to be opportunistic with capital or pay.
Blankfein’s trust-us approach gets the benefit of the doubt from investors because his firm has had the highest ROE of any major investment bank over the past three years. Goldman Sachs executives also note that shareholders aren’t missing out on much: Almost every competitor that has published an ROE target has later cut it.
Meanwhile, Blankfein preaches patience. “You can’t extrapolate from the highs, and you certainly can’t extrapolate from the lows,” he said after the company’s annual meeting in San Francisco in May. “I hope I don’t look back at this period as the golden age.”
Wall Street’s most enduring rivalry has gone through many cycles over its eight-decade history. Morgan Stanley, founded in 1935 after the Glass-Steagall Act forced J.P. Morgan & Co. to separate its investment- and commercial-banking businesses, was once the white-shoe firm with a pedigree. It was a coup for Goldman Sachs to join it in advising big U.S. companies such as Ford Motor Co. When Morgan Stanley went public in the 1980s, Goldman Sachs was buying a commodities shop, J. Aron & Co., and bolstering its reliance on trading.
Morgan Stanley weathered power struggles after its 1998 merger with Dean Witter, whose Main Street brokerage and Discover credit card business made the firm more retail.
Meanwhile, Goldman Sachs was riding the growth of fixed-income trading. Its 1999 IPO was 12.5 times the value of Morgan Stanley’s, and it had better stock performance in each of the next six years. The firm spread its influence. Alumni include U.S. Treasury Secretaries Robert Rubin and Henry Paulson and the current leaders of the two biggest central banks in Europe, Mario Draghi and Mark Carney.
Under John Mack, Morgan Stanley tried to emulate Goldman Sachs’s formula of boosting profit through proprietary trading and investments with the firm’s money. That ended with a mortgage prop-trading desk losing more than $9 billion and an investment in an Atlantic City, New Jersey, casino that cost it $1 billion.
Both firms converted to bank holding companies in 2008 so they could borrow from the U.S. Federal Reserve, recruited outside investors, and received government bailouts. But the rates at which they bounced back differed dramatically.
Morgan Stanley continued to limp along as Gorman took over at the end of 2009, while Goldman Sachs posted record profit that year, taking advantage of recovering markets and fewer competitors.
Goldman Sachs’s performance, along with its reputation for aggressive behavior and its short bet on the U.S. housing market, made it the face of Wall Street greed. Morgan Stanley stayed out of the spotlight, prompting the joke told at both firms that it “strategically underperformed” during and immediately after the financial crisis.
Those experiences shaped the banks’ trajectories. Morgan Stanley needs to show steady progress after years of financial turmoil and one-time charges. Goldman Sachs, whose reputation is the worst of any major U.S. company according to a Harris poll this year, has to try to change the public’s perception.
“Everybody’s got to do whatever they do based upon their own circumstances,” Gorman said in May. “And clearly we were more fragile than some, and less than others, coming out of the financial crisis.”
Gorman is an unabashed champion of his firm, extolling the changes it has made and speaking on each quarterly investor call. Blankfein has taken a statesmanlike role in recent years, commenting on the economy and government policies more often than on earnings. He’s more likely to appear alongside a politician promoting Goldman Sachs’s philanthropic work than he is to speak at an investor conference.
As different as the two men are, they have some things in common. They both abandoned careers as lawyers and can appreciate what it means to be pressured by clients, shareholders, bondholders, employees, media, regulators, charities, and even friends trying to get their kids jobs.
Both draw on past experiences as outsiders for a dash of humility. Gorman talks of paying more than 20 percent interest on student loans as he traveled 10,000 miles from home for business school. Blankfein tells tales of working as a food vendor at Yankee Stadium to earn money.
They’ve also earned each other’s respect.
“They’re a great firm and as tough and resilient a competitor as we face,” Blankfein says. The rivalry “pushes each of us to be better,” echoes Gorman.
Just as their disparate paths led them to the same spot, the two have embraced strategies that can yield the same results: superior returns, higher stock prices, and risk levels low enough to avoid calamity. One doesn’t have to lose for the other to win.
“Can they both succeed?” asks Christopher Wheeler, a bank analyst at Atlantic Equities in London. “Yes.”
On the new Wall Street, there’s more than one way to the top.
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