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What Solomon’s Ascent Signals About Goldman’s Future

Updated on
  • Analysts see investment bankers rising if he takes the helm
  • A new leader may bring ‘fresh perspective’ as trading drags
Bloomberg’s Ramy Inocencio reports on Goldman’s succession plan.

When Goldman Sachs Group Inc.’s leaders unveiled their strategy six months ago to reshape the Wall Street powerhouse into a more traditional bank, it was trading veteran Harvey Schwartz who led the presentation.

Now, it’s his top rival in the race to become the next chief executive officer, David Solomon, who appears poised to carry out the plan.

The abrupt emergence this week of Solomon, 56, as heir apparent to CEO Lloyd Blankfein marked a dramatic turn in fates for the men who spent 15 months vying as co-presidents for the top job -- an outcome that will further a significant shift within the firm. Businesses such as investment banking and financing, which Solomon knows better, keep gaining ground on sales and trading, which long propelled Goldman earnings -- as well as Blankfein’s and Schwartz’s own careers.

“There’s going to be a power shift, there’s no question about it,” said Charles Peabody, an analyst at Compass Point Research & Trading, predicting it may affect the makeup of the powerful management committee. “Sometime in 2020 is when you’re going to see the real struggle for resources develop” between those two sides, he said.

‘Fresh Perspective’

Blankfein and the board were impressed, insiders say, by Solomon’s proven ability to build businesses, the strength of the dealmaking team he assembled and his efforts to recruit and retain talent. Those qualities became even more valuable as the bank decided it had focused too much on hedge funds as trading customers, at the expense of corporations.

In recent years, the firm has leaned more on investment banking and asset management amid an industrywide slowdown in the markets businesses that in 2017 contributed to the worst year for trading under Blankfein’s watch. The CEO had long sought to preserve the firm’s franchise, predicting activity would pick up.

“Performance within the trading division has faced clear headwinds over the past couple of years and we believe a change in leadership may provide fresh perspective,” UBS Group AG analyst Brennan Hawken wrote in a report Monday. He said the shift away from trading “could get a subtle boost under Mr. Solomon given his diverse background (i.e. not another trader).”

Goldman didn’t specify a timeline for Blankfein’s eventual retirement when it announced the shakeup of his lieutenants. Schwartz, 54, will leave the firm April 20, making Solomon the sole president and chief operating officer, the New York-based company said.

So for now, Solomon and Blankfein will jointly execute the strategy presented in September. The plan calls for boosting revenue by $5 billion in three years, in part by expanding operations previously seen as a sideline, such as lending to consumers through an online bank.

Big Clients

Solomon didn’t get an interview with Goldman Sachs after he graduated from Hamilton College in 1984. Instead, he joined more than a decade later, after earning respect as a competitor.

The offer came in 1999 while he was at Bear Stearns Cos. There, he jockeyed with Goldman’s team before the firms ended up collaborating to raise almost $1 billion of high-yield debt to help casino billionaire Sheldon Adelson build the Venetian resort in Las Vegas. Even back then, Blankfein advocated hiring Solomon, who arrived with the rank of partner -- a relatively rare feat. Over the years, he’s maintained client relationships with U.S. corporate leaders including Walt Disney Co.’s Bob Iger and General Electric Co.’s Jeff Immelt and John Flannery, according to a person with knowledge of the business.

“David was a very young guy at Bear Stearns, but it was very apparent he was a gifted manager even back then,” Alan Schwartz, chairman of Guggenheim Partners who worked with Solomon at Bear Stearns, said in an interview. “When he went to Goldman we were disappointed, but not at all surprised of the number of jobs and promotions he picked up over time.”

Solomon rose through Goldman’s financing operation and eventually ran the firm’s top-ranked investment-banking arm for a decade. During that time, Goldman Sachs decided to build out the debt capital markets business, largely territory dominated by the commercial banks like JPMorgan Chase & Co. and Bank of America Corp. The unit now ranks among the largest lenders to M&A buyers.

Even as the bank’s bond trading results faltered, it kept growing in debt underwriting. Goldman earned a record $2.94 billion of revenue from that business last year, according to data compiled by Bloomberg. That’s been helped by deals such as Amazon.com Inc.’s purchase of Whole Foods Market Inc., where the bank provided short-term bridge loans.

Building Goldman's Underwriting Prowess

Revenue from debt underwriting climbed to $2.94 billion at the end of 2017

Source: Company filings

Yet, it’s not like he doesn’t know trading. His initial years at Goldman included stints running leveraged finance and a larger credit business. By 2002, he was a member of the fixed-income business’s operating committee, overseeing the Asian special-situations group, corporates, credit derivatives, credit research and leveraged finance.

Solomon is known for his adaptability, honing a wide range of skills professionally and in his personal life. He moonlights as an electronic music disc jockey, skis avidly, collects wine and eats out frequently, picking restaurants with the purposeful zeal of a food critic. The Society of Bacchus America once awarded him the title Mr. Gourmet 2010.

But his absence during last September’s presentation also underscored one of the banker’s weaknesses as a CEO candidate that matters for any company: Big shareholders didn’t know him. He set out to fix that in the months that followed, traveling the globe for more than two dozen one-on-one meetings with large investors. Just last week, he visited Boston to sit with Fidelity Investments and MFS Investment Management Co.

In notes on Monday, some analysts mentioned that they too had met with Solomon. Several welcomed his ascent because, strategy aside, it resolves uncertainty.

“It removes the risk that there could have been co-CEOs upon Blankfein’s retirement,” Brian Kleinhanzl, an analyst at Keefe, Bruyette & Woods, wrote in a note to clients. “That structure can be unwieldy.”

— With assistance by Katherine Chiglinsky, Jennifer Surane, and Sonali Basak

(Updates with Alan Schwartz comment in 12th paragraph.)
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