New Lloyd, Same Goldman
“Today’s decision is a setback for the environment and for the U.S.’s leadership position in the world.”
With those 102 characters, Lloyd Blankfein introduced himself to Twitter, taking a swipe at President Donald Trump for pulling out of the Paris climate accord.
The Goldman Sachs Group Inc. chief executive officer’s June 1 debut on the social media platform was unusual. No other leader of a big U.S. bank has an official Twitter account. Most avoid taking stands on political issues in any venue for fear of igniting a backlash or damaging their brand. And Blankfein, who has been the target of public scorn for his bank’s role in the 2008 financial crisis, was opening himself up to more abuse.
“I felt there was some inevitability to it,” Blankfein said in a June 27 interview, six Twitter posts and 40,000 followers later. “In this world, part of my job is to make us understood because the consequences of not being understood were made quite vivid to me.”
Blankfein’s embrace of a new technology and his willingness to speak out on controversial issues go hand in hand with a strategic retooling as he begins his 12th year as the bank’s leader. Call it Lloyd 3.0. If the first act of Blankfein’s career ended with the crisis, and the second covered its aftermath, the third began a year and a half ago with his recovery from lymphoma and his decision to stick around.
His longtime deputy and heir apparent, Gary Cohn, took the cue and left for a job in Trump’s White House, precipitating a management reshuffle. Blankfein’s decision also led to questioning by some investors and analysts about whether he can rejuvenate a business that has struggled to show revenue growth for the past five years and where trading market share has stayed flat as rivals gained ground. Had the thinking at the top gone stale?
“They are a boat without an oar trying to navigate choppy waters,” said Brian Kleinhanzl, an analyst at Keefe, Bruyette & Woods. “If you don’t get better banking, better trading, then what are you going to do to improve revenue? I don’t know that they have an answer to that.”
If anyone expected Blankfein’s illness would make him forsake Wall Street, they would have been sorely mistaken. That was the message he conveyed in his office in January 2016, after 600 hours of chemotherapy and encouraging reports from doctors. Sitting with his feet propped on a coffee table, looking thin in jeans and an open-collar shirt, Blankfein sounded like a man who had suddenly come to terms with his own mortality. And what he realized, he said, was that work was a lovely distraction.
In the 18 months since then, Blankfein, 62, has stitched together a patchwork of new initiatives: a consumer bank, a heightened focus on lending and more resources for asset management, including a suite of exchange-traded funds. Mostly he has doubled down on an old idea — a commitment to trading and risk-taking out of favor across much of Wall Street. He has kept the 148-year-old firm tied to trading, investment banking and principal investing.
That’s fine with the bank’s board, according to a person with knowledge of its deliberations. The directors also believe Blankfein, who has led the company longer than anyone since John L. Weinberg retired in 1990, deserves more time to rehabilitate his reputation, the person said.
Some current and former partners, as well as members of the investment community, are less convinced. They worry Blankfein hasn’t done enough to adapt to slower economic growth and tougher capital rules that have handcuffed his traders. And while Trump’s proposed tax cuts and plans for looser banking regulation may help, few expect industry revenue to bounce back to the days when Wall Street gorged on derivatives deals.
“I could see some people saying it’s challenging, and where’s growth?” Blankfein said. “We aren’t waiting for the markets to get more active, though we think they will. We’ve identified growth strategies in each of our businesses, and we are pursuing them.”
Blankfein has overseen a 55 percent gain in the stock price during his tenure, boosted by a 33 percent surge last year on hopes Trump will remove the shackles from Wall Street. That’s better than the S&P 500 Financials Index over the same period, though not as good as the broader market, which has almost doubled. And the company’s stock has slumped 5 percent this year as Trump and Congress struggle to pass legislation.
That’s not to say Blankfein hasn’t been successful. He’s one of just two big-bank CEOs — JPMorgan Chase & Co.’s Jamie Dimon is the other — to have kept his job through the financial crisis. And Goldman Sachs still boasts some of the industry’s best returns after surviving and prospering during a maelstrom that upended rivals. His biggest accomplishment may be what he’s done for the firm’s reputation in the years since, according to four former partners who asked not to be identified discussing his performance.
For six months in 2009, Goldman Sachs couldn’t catch a break. That July, Rolling Stone called the firm a “great vampire squid wrapped around the face of humanity.” A few months later, Blankfein was mocked for telling London’s Sunday Times that bankers do God’s work. By January 2010, the public was furious that employees collected $16 billion in compensation even as the crisis forced more than 8 million Americans out of work. The bank’s toxic reputation was cemented that April when the Securities and Exchange Commission charged it with defrauding investors in the sale of mortgage securities.
In response, the son of a postal worker who grew up in a Brooklyn housing project set about highlighting Goldman Sachs’s softer side. Blankfein took $500 million from bonuses to provide money and advice to budding entrepreneurs through the bank’s 10,000 Small Businesses program. He created a business standards committee. And in 2012, he hired Jake Siewert, a Democratic political veteran, as head of a communications office charged with rehabilitating the brand. Blankfein is again highlighting the social benefits of banking.
Trump and other politicians went after Goldman Sachs anyway during last year’s presidential race, portraying the firm as a symbol of what’s wrong with America. Then, after the election, the bank was once again in favor. Trump hired three former partners to top positions — Cohn, now chief economic adviser; Treasury Secretary Steven Mnuchin; and Dina Powell, deputy national security adviser — ensuring that Blankfein’s Wall Street worldview is well represented in the White House.
Even so, Blankfein has been vocal in opposing Trump policies, more in line with the heads of technology companies than peers in the banking industry. In January, an executive order barring immigrants from seven predominantly Muslim nations, including Iran, from entering the U.S. forced the partner of a Goldman Sachs employee who held an Iranian passport to change her travel plans. Blankfein was quick to respond, sending a sharply worded voicemail to the bank’s 34,000 employees denouncing the ban.
“I can’t have people obsessing that they won’t have a fair crack at life because they might be gay or lesbian, or they couldn’t move around the firm because their wife had an Iranian passport,” he said in the June interview.
The stance has endeared him to employees and certainly hasn’t hurt the bank’s ability to recruit young talent. This year, it attracted more than 250,000 applications from undergraduate and MBA candidates for internships or full-time jobs, up 40 percent since 2012.
“I’d be hard-pressed to find people who don’t think we get the best people, because we do,” Blankfein said.
Despite the volatility in public opinion, corporate America still chooses the bank above others to handle complex transactions. The firm ranks No. 1 in leveraged-loan underwriting, mergers advice and commodities trading.
After Cohn’s departure, Blankfein made David Solomon, one of the co-heads of investment banking, and Harvey Schwartz, then-chief financial officer, co-presidents. He moved others into the roles they vacated. Some analysts say Solomon and Schwartz need a few years to settle in before they’d be in a position to replace Blankfein, and few expect either to alter the firm’s focus.
In the meantime, Blankfein is pushing ahead with plans to reinvigorate the business. He’s pouring resources into the investment-management division, which oversees almost $1.4 trillion. He bought a deposit-taking platform that has taken in $5 billion. And he’s lending more: to corporations and private equity firms; to wealthy clients; and to Main Street customers, through a new online lender called Marcus, after founder Marcus Goldman.
“Lloyd’s view is that since the day we became a bank we were incurring the costs and expenses of being a bank,” said Stephen Scherr, head of strategy for Goldman Sachs and CEO of the consumer bank. “The challenge he put to us was why not use it more effectively.”
Blankfein, a former gold salesman who rode the firm’s fixed-income business to the top, has been slower than rivals to embrace possibilities for growth outside trading and investment banking.
That’s a problem because the business has changed since 2009, when Goldman Sachs trading desks collected more than $33 billion. Wall Street’s role in the financial crisis sparked a backlash. On Jan. 21, 2010, the same day the bank reported its second-best annual revenue ever, President Barack Obama proposed a measure that many viewed as a rebuke of its business model. The proposal, which became part of the Dodd-Frank Act, prevented firms from trading for their own account or owning large stakes in hedge funds and private equity funds, businesses that helped fuel Goldman Sachs’s rise.
Dodd-Frank’s trading rule, named for former Federal Reserve Chairman Paul Volcker, has made it more difficult to hold bonds for long periods. Tougher capital requirements have increased trading costs. And regulators have browbeaten banks into abandoning units that held inventories of commodities such as aluminum and oil.
It has added up: Revenue from fixed-income, currencies and commodities trading at the biggest investment banks has fallen 42 percent since 2009, according to data compiled by Bloomberg.
Other banks, including European lenders struggling to raise capital, have closed trading floors. Goldman Sachs rival Morgan Stanley cut 25 percent of its fixed-income sales and trading employees. Blankfein is betting that when economic growth picks up, Goldman Sachs will be rewarded by loyal clients thankful for its commitment.
The key to Blankfein’s strategy is figuring out which changes are fleeting and which are permanent. The bank is reviewing its commodities-trading business after the worst first half in a decade. But largely it’s a question that hasn’t been answered yet.
Nine years after the financial crisis, economists, politicians and pundits are waging a fierce debate about the prospects for the U.S. economy. Can it return to the growth rates of the 1980s and ’90s, when it regularly expanded by 3 percent or more? Or is it irreparably hampered by stagnating labor force growth and worker productivity? Mnuchin has promised to boost growth rates above 3 percent, a goal former Fed Chairman Ben Bernanke has called a “long shot.”
Blankfein may get help from Trump. Mnuchin, a 17-year veteran of Goldman Sachs who went on to start a hedge fund and finance Hollywood movies, unveiled a report last month that called for simplifying the Volcker Rule. In the past, the bank may have reaped as much as 30 cents for every dollar invested in a fund, including management fees and ownership stakes, according to calculations made by KBW analysts. The Treasury’s suggested exemptions for some funds would help.
If it happens, Blankfein will look smart. He moved more slowly than rivals to jettison his fund investments and applied for extensions. In May, the bank said it was granted an additional five years to sell stakes worth about $6.2 billion at the end of March. That’s more than any competitor.
“We feel over a cycle that we have done very well,” Blankfein said. “But risk is risk. We may not be doing something that other people are doing and we may eventually be sad about that, or we may be happy about that. I wish we were out of the mortgage market in the run-up to the financial crisis, but then people would have thought we were underperforming.”
To weather the lull, Blankfein has focused on improving returns. He has overseen the retirement of well-paid senior partners, cut noncompensation expenses to the lowest in a decade and asked traders to find more efficient ways to trade stocks and bonds electronically. Even so, new rules and higher capital requirements are making it harder to return to the days when Goldman Sachs was the envy of Wall Street for its ability to generate 30 cents or more in profit for every $1 in shareholders’ equity. Last year, it was less than 10 cents.
“The regulatory pendulum has stopped swinging against them,” said Guy Moszkowski, an analyst at Autonomous Research. “But we will never get all the way back to where we were before 2007. Nor should we.”
Blankfein has said he’d like to operate with less capital, and he may get his wish: Regulators plan to soften annual stress tests, allowing banks to return more of their earnings to shareholders. In June, the Fed said it didn’t object to Goldman Sachs’s capital plan, paving the way for it to pay dividends or buy back shares.
Still, returns can’t improve if employees don’t execute. Goldman Sachs trading desks failed to deliver first-quarter revenue gains enjoyed by competitors. The bank blamed low volatility in currency and commodities markets. Losses on a distressed-debt desk also hurt.
Analysts expect earnings per share to slip 7 percent in the second quarter, according to data compiled by Bloomberg. That, combined with estimates for the rest of 2017, would deliver a return on equity of less than 10 percent for the second year in a row. The bank is scheduled to report results next week.
“Investors are skeptical and appropriately so,” said Steven Chubak, an analyst at Nomura Holdings Inc. “Some of their growth initiatives are still in the nascent stages of development.”
It would be foolish to count out Blankfein, who, like any good trader, has learned to adapt to adversity. In 1998, when he was running the firm’s fixed-income business, the near failure of hedge fund Long-Term Capital Management caused trading revenue to plunge more than 30 percent. While the CEO at the time, Hank Paulson, told investors he wanted to cut back on trading, Blankfein saw that competitors were wounded as well.
Over the next few years, Blankfein pushed Goldman Sachs to expand so much that in 2004, trading and principal investing contributed 65 percent of revenue, up from 28 percent in 1998. In 2006, when Paulson left for Washington, Blankfein was made CEO.
Eleven years later, all of Wall Street is watching. If relaxed regulation and buoyant markets help the firm mint money, he’ll have proven there’s still some life left in the old trading model. If not, his legacy may be that of yet another executive who needed to change but couldn’t.