Goldman Sachs Is at War With Itself

Blankfein wasn’t the only one complaining. Partners faulted Solomon, who wasn’t present at the bar, for presiding over a money-losing expansion into consumer lending that Goldman is now unwinding. The consumer business, they said, didn’t make the partners money. That stood in contrast with the bank’s other units.

Cracks are forming in a Wall Street institution: the vaunted Goldman Sachs partnership. 

Most bank CEOs make big decisions with a cadre of executives. Goldman isn’t like other banks. Some 24 years after becoming a publicly traded company, Goldman maintains a partnership of about 420 members, many of whom think they’re just as important as the CEO. 

In his nearly five years as CEO, Solomon, 61, has sought to impose corporate discipline on the freewheeling structure. Partners accustomed to little oversight and lots of deference aren’t thrilled. 

Solomon has sparred over bonuses with the partner who leads the bank’s traders. Another longtime partner threatened to quit when Solomon restructured the bank’s private-investing businesses. John Rogers, a Goldman partner since 2000, and the secretary to the bank’s board, expressed concerns to Solomon about his DJ side gig, according to people familiar with the matter, saying it wasn’t a good look for the CEO of one of Wall Street’s most formidable firms.

Goldman spokesman Tony Fratto said differences of opinion reflected healthy debate at the firm and “show partners and business leaders engaging with David on strategy and initiatives.”  

“The reality is smart people can have disagreements. It’s normal,” he said.

The internal drama has spilled into public view. Solomon has told partners to refrain from leaking to the media, people familiar with the matter said. 

Cracks in the partnership

Solomon needs the support of the partners. He’s presiding over Goldman’s biggest overhaul since the 2008 financial crisis, jettisoning much of the ill-fated consumer business in favor of an expansion of steady fee-generating businesses such as wealth and asset management. A deal-making slump, meanwhile, is battering the bank’s bread-and-butter investment-banking businesses, sending profits down sharply.

Solomon’s allies say he’s managed to revive the bank’s lackluster stock, which is up about 51% since he took over, compared with a roughly 23% decline for a broader index of bank stocks. And the One Goldman Sachs initiative, which incentivizes employees to refer Goldman clients to other divisions of the firm, that he announced on his first day as CEO has helped the bank squeeze more revenue out of existing clients and attain a greater share of their business. Goldman’s senior executives say this initiative has already bolstered the bank’s investment banking and trading returns. 

“The stock price has doubled since the depths of the pandemic. And the firm saw record performance in 2021. Doesn’t David deserve some credit for that?” said former partner

Since the late 1800s, Goldman partners have weighed in on the firm’s direction. They conveyed their opinions to Goldman’s chief—for a long time known as the senior partner—and engaged in debate. Partners sometimes overruled the CEO or persuaded him to go along with their plans. 

Tensions have run high among the partnership many times in its history, including over whether to take the company public, in part because of concerns about what it would mean for Goldman’s heritage and how much money partners would make. 

Former partners, too, hold considerable sway. Goldman has long maintained close ties to retired executives, including those who’ve gone on to senior government positions. Goldman counts former U.S. Treasury secretaries and a prime minister of Australia among its prominent alums. 

Former partners get briefings from the firm’s finance chief and gather annually for dinners in New York and London. Blankfein visits Goldman’s headquarters occasionally, popping in on the trading floors to say hello, eating at the cafeteria and meeting with the people who manage his personal accounts.

For a long time, the CEO was viewed as one of many, less a benign dictator and more the bank’s public face and standard-bearer. Blankfein often behaved like the senior partner, people familiar with the matter said, preferring persuasion to decree when it came to decision-making.

Things changed when Solomon got the top job in 2018. 

Goldman’s stock had languished and the bank was facing a slew of government investigations tied to its dealings with a Malaysian investment fund. A Goldman partner pleaded guilty to helping to loot billions of dollars from the fund, 1MDB. The episode ultimately cost Goldman billions of dollars and an embarrassing admission that it hadn’t done enough to police its far-flung partners. 

And partners no longer had the financial stake in the bank they once did. In 2000, a year after the bank went public, they had about 62% of the bank’s shares. That had declined to about 9% by 2008. By the time Solomon took over, partners owned around 4%.

Solomon, the first CEO who didn’t work at the bank when it was a private partnership, did away with the flat hierarchy that gave partners wide leeway to call their own shots. Longtime partners said they found it harder to communicate with Solomon than Blankfein, who encouraged people to stop by his office for informal chats.

Ericka Leslie, co-chair of Goldman’s partnership committee and the firm’s chief administrative officer, said Solomon is accessible. “When you do send him a note, he is very responsive and back to you very quickly,” she said. 

Soon after becoming CEO, Solomon began an effort to unite Goldman’s investments in private equity, credit and real estate, housed in its merchant-banking division, with a “special-situations group” that was tied to its securities division. Both groups used Goldman’s own money, to varying degrees, in investments.

Rich Friedman, a partner since 1990 who helped expand the merchant-banking division over more than two decades, didn’t like the plan, according to people familiar with the matter. You have two great businesses, he told Solomon. Merge them and you might end up with one big mess.

Solomon overruled Friedman. Goldman’s new CEO didn’t like that the bank’s own investments were scattered throughout the firm. He also wanted to reduce Goldman’s reliance on using its own balance sheet for deals.

Friedman threatened to quit, but some executives convinced him to stay. He became chairman of the asset-management division and has since largely stayed out of the unit’s day-to-day operations.  

Making a splash

Solomon also pushed Goldman deeper into the business of serving consumers. Blankfein had launched the effort a few years earlier, before he retired, with a few offerings—personal loans, a high-yield savings account—under the brand Marcus, named for founder Marcus Goldman.

At Goldman’s first-ever investor day in 2020, Solomon said the bank was building a “digital consumer bank of the future” that would offer a broad range of products and services. A longtime corporate deal-maker, he was also talking with partners about making a big splash in the business with an acquisition. He set his sights on consumer lender GreenSky. 

Partners running the consumer business had earlier told Solomon they weren’t sure it was a good idea. GreenSky’s borrowers got their loans through third parties, meaning they lacked a direct relationship with the lender that Goldman could build upon. The high price that GreenSky’s CEO wanted for the company was another problem, they told Solomon. Solomon eventually did the deal anyway, convinced it was needed for Goldman to become a serious player in consumer lending. 

By early 2022, Goldman’s models were projecting that returns from the consumer business wouldn’t exceed 10% over the next decade, according to people familiar with the matter, well below that of its other businesses. Costs associated with rolling out new consumer accounts and money that had to be put aside to cover for potential loan losses ate into profitability.

Jim Esposito, who is now Goldman’s co-head of global banking and markets, had grown skeptical of the consumer foray. He and other partners asked Solomon if they should continue with the consumer effort based on these numbers. Solomon told them he was sticking to the plan. 

Partners lobbied Solomon’s second in command, John Waldron, to change course, saying the consumer operation was diverting resources from profitable businesses, people familiar with the matter said. Solomon and Waldron, Goldman’s president, both worked at Bear Stearns earlier in their careers and have long been close.

It wasn’t the first time Waldron found himself answering for Solomon. A few years earlier when Covid was ravaging New York, Waldron defended Solomon when a furious Gov. Andrew Cuomo lambasted the Goldman CEO for DJing a party in the Hamptons. Waldron was talking to the then-governor of New York about the bank’s return-to-office plans, according to a person familiar with the matter. 

He also backed Solomon’s decision to change the way the firm determined bonuses, including factoring in whether employees steered clients to other divisions within the bank. Solomon also let fewer partners leaving for other jobs keep their unvested Goldman stock.  

Ashok Varadhan, co-head of global banking and markets, was one of the partners who challenged Solomon on the question of pay. Trading revenue at Goldman last year was the highest it had been since 2009, and he felt his traders’ cut of the firm’s bonus pool was far too small. Solomon and Waldron agreed to sweeten the pot, but not to the level that Varadhan wanted. 

Partners unhappy about the money-losing consumer unit, meanwhile, were flagging their concerns to Waldron. Last year, he ordered a review of the entire consumer operation and concluded it needed to shrink. It was becoming clear that Goldman would need to keep spending more money for less attractive returns. Solomon agreed.

At Goldman’s investor day in February, Solomon said the bank was considering options to scale back on a big chunk of its consumer lending after disclosing that the division that houses much of this business had lost $3.8 billion on a pretax basis since 2020. The bank is now looking for a buyer for GreenSky.

“There were some clear successes, but there were also some clear stumbles,” Solomon said at the time. “We learned a lot.”

“We’ve executed well on about 85% of what we said we would do,” said chief strategy officer Carey Halio. “Not everything’s been perfect, we acknowledge, but we’re learning and adapting and driving a more focused strategy to continue to deliver for shareholders.” 

Late last year, private-equity firm Carlyle sounded out Waldron when it was looking for a new CEO, according to people familiar with the matter. The job went to Harvey Schwartz, who had left Goldman in 2018 when it became clear that Solomon would beat him out for the role of CEO.

Waldron is a top contender to succeed Solomon when he retires, according to people familiar with the matter. 

Solomon, facing negative press, is trying to strengthen ties with the partners. 

He has started inviting partners and their spouses to his Manhattan apartment for food and drinks, according to people familiar with the matter. He has held small retreats, including gatherings in Texas and California, so partners can spend one-on-one time with him and Waldron. 

At the February meeting in Miami Beach, he told partners he wants to hear from them.

“I’ll tell you sitting in my seat it’s a lot more complicated than I understood it was before I sat in my seat, but that doesn’t mean all of you don’t have a voice to share your views, give us advice, engage with us, please do,” he said. “Call, write, send a secret Santa note if you don’t want to put your name on it, but let us know what you think.”

Write to AnnaMaria Andriotis at [email protected]