The War Inside Goldman Sachs – The Journal.

This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.

Kate Linebaugh: Wall Street is many things. It’s an actual street in New York City, it’s a symbol of American finance, and it’s also a thing of lore. Just think about the movies.

Jordan Belfort: Pick up the phone and start dialing. I want you to deal with your problems by becoming rich.

Kate Linebaugh: And among Wall Street firms, there’s one that stands out from the rest.

AnnaMaria Andriotis: Goldman Sachs is the most elite Wall Street institution, period.

Kate Linebaugh: That’s our colleague, AnnaMaria Andriotis. She covers Goldman.

AnnaMaria Andriotis: It reaches into not only the biggest companies in the US and in the world, it reaches deep in governments. Goldman Sachs is the institution where companies and governments go to when they need help, be it raising capital, doing bond deals, that is what Goldman is.

Kate Linebaugh: And big picture, what’s going on at Goldman Sachs right now?

AnnaMaria Andriotis: The big picture is that not all is well at Goldman Sachs. There is disagreement about the direction of the firm, and whether it’s made some strategic mistakes in recent years.

Kate Linebaugh: At the center of the debate is Goldman CEO, David Solomon. Under Solomon, the stock price of Goldman has gone up, but some of the firm’s top executives have been privately complaining about Goldman’s direction.

AnnaMaria Andriotis: These disagreements and debates are about what is Goldman Sachs right now? What is it trying to become? What is our strategy? Why did these mistakes occur, and is this largely the fault of the CEO, or no?

Kate Linebaugh: Welcome to The Journal, our show about money, business and power. I’m Kate Linebaugh. It’s Wednesday, June 21st. Coming up on the show, the war inside Goldman Sachs. Every Wall Street firm runs a little differently. For more than 100 years, Goldman Sachs was run as a private partnership. If you worked there, you wanted to make partner, which meant investing your own money in the firm and getting a say in how it was run.

AnnaMaria Andriotis: Effectively, it was, “We’re all in this together as partners. Our interests are largely aligned, because we’re all invested in this firm together, and we move together as one.” Now, there wasn’t a CEO, but there was somebody called the senior partner, which was effectively the CEO, the head of the firm, but that individual didn’t rule by decree, “I am senior partner, hear me roar.” Instead, it was really working together with the other partners to make decisions.

Kate Linebaugh: And were partners given a lot of autonomy in their own business units?

AnnaMaria Andriotis: They ran their own show. They knew the markets that they were working in, that they specialized in the best, sometimes better than the senior partner, and they made decisions on their own. The other thing was that the senior partner was often overruled by partners if they didn’t agree, and some people remained partners for decades. Others go on after a few years of being partners to do their own thing somewhere else, and Goldman has historically looked at even its alumni, the partners who have left, as really important stakeholders, and maintain close connections to them, because you never know where that partner will end up. They could end up at a firm that might be a client of Goldman’s, or that Goldman might want as a client.

Kate Linebaugh: Or they could end up as the chairman of the SEC.

AnnaMaria Andriotis: That’s right, or they could end up being treasury secretary, chairman of the SEC, in a important position within the EU. Correct.

Kate Linebaugh: In 1999, Goldman went public, and as part of that, the company’s ownership and structure changed. Goldman could now have the public as outside investors, and instead of a senior partner, Goldman now had a CEO. And one of the jobs of Goldman’s CEO was maintaining the partnership culture.

AnnaMaria Andriotis: So now, basically the challenge is, how do you balance that? How do you balance a publicly traded company, and one that is both a publicly traded company and a partnership? And that’s where a lot of the friction has rested in recent years.

Kate Linebaugh: The current person trying to strike that balance is David Solomon. Solomon became CEO in 2018. He’s 61 years old, bald, brash, and he’s known for having an unusual hobby.

AnnaMaria Andriotis: David Solomon in the world of EDM, electronic dance music, was previously known as DJ D-Sol, D for David, Sol, S-O-L, for Solomon. He’s performed at nightclubs, at music festivals like Lollapalooza.

Kate Linebaugh: It’s more than just a hobby, then?

AnnaMaria Andriotis: It is much more than just a hobby. We’re not talking about DJing Sweet Sixteens or Bar Mitzvahs, right? This is not what this is. Think about some of the top DJs, the music acts out there that draw thousands of people at outdoor festivals. This is the world where David also exists.

Kate Linebaugh: Solomon was the first CEO at Goldman who hadn’t been at the company when it was a private partnership. He joined from Bear Stearns.

AnnaMaria Andriotis: It was clear from when he took over as CEO that he was there to impose corporate discipline on what was a freewheeling structure. What was that freewheeling structure? It was that partners were accustomed to little oversight, and they weren’t thrilled that somebody was coming in and was prioritizing the fact that Goldman was and is a publicly traded company, prioritizing that over partners and their desires of whatever it was they wanted to do, with regards to their own business units. His style was different, and people, including partners, there was a level of discomfort with what they viewed as, “This is not somebody who’s as approachable as his predecessor. This is not somebody who you can engage with a debate, in particular, if you’re on the other side of that debate.”

Kate Linebaugh: One of Solomon’s big gambits was to further Goldman’s bet on consumer banking. Under the previous CEO, Goldman had gotten into personal loans and partnered with Apple on a credit card, but Solomon wanted to go further, and people AnnaMaria spoke with told her that that sparked disagreement.

AnnaMaria Andriotis: David pushed and directed his deputies to push further into consumer. They were out there, they were very aggressive trying to get more partnerships, and he started talking about how they needed to make a big acquisition, a big splash, something that would cement their status as a consumer lender.

Kate Linebaugh: And he set his sights on this company called GreenSky. What is GreenSky?

AnnaMaria Andriotis: So GreenSky arranges for loans to be given to consumers. In most cases, those loans are related to home improvement. So you’re replacing the windows in your home, the company that you’re looking to buy the windows from says, “Oh, we offer financing via GreenSky.” There’s many reasons why GreenSky could be seen as a smart acquisition. Many of these borrowers have very high credit scores, so you don’t really have a delinquency risk.

Kate Linebaugh: But not everyone was on board. Several Goldman partners told AnnaMaria they didn’t think Goldman should buy GreenSky. They thought the price of the acquisition was too high for a company that didn’t have a direct relationship with consumers.

AnnaMaria Andriotis: There were a lot of partners who thought this was a very bad idea, who told David not to move forward. The deal went through, I mean, this was something that David really wanted to do, period.

Kate Linebaugh: Goldman paid about $1.7 billion for GreenSky, but the deal would deepen the rift between Solomon and the Goldman partners. That’s coming up. Every year, Goldman holds a gathering of senior leaders where it’s roughly 400 partners get together and talk about the business. This past February, the meeting was in Miami Beach.

AnnaMaria Andriotis: What I was told is that the former CEO, Lloyd Blankfein, was there at one point. He had a dinner with some partners, and then went to a hotel bar and let it rip.

Kate Linebaugh: What do you mean when you say Blankfein let it rip?

AnnaMaria Andriotis: He talked about how he felt that David was spending too much time away from his day job, that he was DJing, and the DJing was not something that Lloyd was a fan of. This idea that you’re a CEO of Goldman, and you should be focused on Goldman, but you’ve been out there DJing at festivals, and nightclubs, and jetting around on Goldman’s private plane. Lloyd also let it rip about the consumer business, and how he wouldn’t have let it expand to the level that David did, and wouldn’t have let it get to the level of losses that Goldman had just recently actually disclosed, in the billions of dollars of losses. The partners who were present there were in agreement about it. They were also complaining about the money losing expansion into consumer.

Kate Linebaugh: What did you make of that? That you have the former CEO trashing the current CEO at a Goldman sponsored event?

AnnaMaria Andriotis: That gathering, I think, was the ultimate reflection of the tension that exists at the highest levels of Goldman, where the former CEO feels completely comfortable just letting it rip about his successor.

Kate Linebaugh: Those tensions went beyond drinks in Miami. Solomon has clashed with partners over everything from bonuses, to the way certain businesses are structured. Even his side gig as a DJ has come under fire. One longtime partner told Solomon that DJing wasn’t a good look for a Wall Street CEO. A spokesperson for Goldman said differences of opinion reflected healthy debate at the firm, and, “The reality is, smart people can have disagreements.” Does David Solomon need the partners or can he run things on his own? I mean, he is the CEO.

AnnaMaria Andriotis: That’s a great question, Kate. He needs the partners, and he’s realized that, because what occurred is in not giving the partners as much time as they were used to getting, in not listening to some of the advice from partners, partners started leaking.

Kate Linebaugh: They started leaking negative stories to the media.

AnnaMaria Andriotis: Sure, yes. And then David had a problem on his hands.

Kate Linebaugh: Is this a crisis for David Solomon?

AnnaMaria Andriotis: I think it could develop into a crisis. I think the GreenSky situation is an example of how it could develop into a crisis, because it’s one thing to be like, “Oh, he’s mean. He’s rude. He doesn’t listen to me,” but that’s not a business thing, in the end. But when an acquisition is made that they’re now looking at potentially taking a pretty big loss on when they sell it, okay, so now that’s a loss to Goldman.

Kate Linebaugh: In April, Solomon said Goldman is now trying to sell GreenSky, roughly a year after buying it. Basically, GreenSky is no longer a strategic priority for Goldman. Meanwhile, Solomon is going on a charm offensive trying to get partners in his corner.

AnnaMaria Andriotis: So what’s been happening over the last few months is an effort by David to get closer to the partners. He’s inviting them over his apartment in the city for drinks and food, them and their spouses. He and his deputy, John Waldron, have been going on these small retreats, this is new, with partners, upstate New York, in Texas, in California, elsewhere. Why is this all happening? Well, okay, so one person said to me, “Part of this has to do with when there was COVID, and we weren’t in the office, there wasn’t as much interaction between the partners and David.” But yeah, there’s also an element of this, an element of making clear to the partners that David does care what they have to say, and does want to hear from them, and really doesn’t like the fact that they keep describing him as not being approachable, not being as easy to talk to as Lloyd.

Kate Linebaugh: Are there any leadership lessons that can be taken away from this?

AnnaMaria Andriotis: The leadership lessons are, when things were going really well at Goldman, 2021 being one example of that, a booming year for investment banking, could David afford to be brash, and do his own thing, and not listen to what others there were telling him about strategic decisions, or things that he was doing on the side in his personal life? Yeah, he could, because everybody was getting paid massive bonuses, and the firm was doing fantastic. But the tide always turns, and if you don’t have enough people on your side, especially in what is still a partnership, or a quasi-partnership, however we can call it, that’s going to become a problem for the CEO. Whoever the CEO of Goldman is, now and in the future, will not only need to continue paying attention to the shareholders, but will also need to be devoting a lot of their time to the partners. Because despite the partners owning a really small share, a really piece of the company, they have demonstrated through their displeasure that they are actually quite powerful.

Kate Linebaugh: That’s all for today, Wednesday, June 21st. The Journal is a co-production of Gimlet and The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We’re out every weekday afternoon. Thanks for listening, see you tomorrow.