How David Solomon won the cage fight for Goldman Sachs

When Gary Cohn answered the call of Donald Trump and took off for Washington in December 2016, Goldman Sachs set up a classic cage match to find its next CEO-in-waiting.

Mr Cohn, president and chief operating officer, had long been seen as the heir apparent to Lloyd Blankfein, who had run the Wall Street bank since 2006. To find his replacement, the bank found another pair strikingly similar in appearance to the tall, bald ex-commodities trader: David Solomon, from the investment banking side of the business, and Harvey Schwartz, from securities.

Goldman has arranged this kind of face-off before, allowing contenders for the top job to prove themselves to outsiders by performing a variety of CEO-like functions, while shoring up support internally. The Schwartz/Solomon contest was a particularly bloody one, according to some insiders, and its outcome points to the strategic direction the firm is likely to go in.

Conditions

But conditions favoured Mr Solomon from the outset. Goldman’s securities business was in unusual amounts of turmoil, hit by moves to electronic markets and patchy activity among big clients such as hedge funds. Last year, the core bond-trading division, traditionally a big driver of profits, saw revenues slip yet again, from $7.6 billion (€6.1 billion) in 2016 to $5.3 billion — less than one-quarter the peak of 2009.

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The commodities sub-unit, which launched Mr Schwartz’s career, had a particularly grim time, recording the lowest annual revenues in the bank’s history as a public company. Bad bets in gas and power in early 2017 led to a review of the unit and several big-name departures, including global commodities head Gregory Agran.

"We have limited confidence in predicting when [ Goldman's ]trading revenues will recover," said Brennan Hawken, analyst at UBS.

The investment banking business, meanwhile, was humming along. Last year it produced net revenues of $7.4 billion, its second-highest annual haul, with a record $2.9 billion contribution from debt underwriting, a business Mr Solomon helped to develop after his arrival from Bear Stearns – a rare outside hire into the partnership – in 1999. Goldman also did a lot more straight lending to companies, making more of the bank holding company status it picked up in the depths of the financial crisis.

Under Mr Solomon, who can be gruff and quick to anger, bankers were urged to get on the road, developing ties in cities like Atlanta and Seattle, rather than relying on relationships built in New York or San Francisco. “He’s not the guy to get a call from when you miss a deal,” shivers one Goldman banker.

Monetisation

This big internal push to "monetise" corporate relationships has dismayed some of Goldman's top bankers, who see themselves as a cut above cross-selling specialists at universal banks such as Bank of America and Citigroup.

But analysts recognised that Mr Schwartz’s departure is a clear indication of which side of the house is on top. Last September Goldman set out a plan to generate an extra $5 billion of annual revenues by 2020: a target that included $2 billion from financing and lending, and just $1 billion from trading.

Mr Blankfein, a former commodities trader, could have been expected to have a natural affinity for Mr Schwartz, who also began in commodities before climbing the ranks of the securities business. But Mr Solomon was the name Mr Blankfein put to the board last month as his recommendation to succeed him, according to a source.

"This is showing the direction where Goldman wants to go," said Brian Kleinhanzl, analyst at Keefe, Bruyette & Woods in New York. "Investment banking, corporate lending; this is more appropriate for Solomon's background."

Mr Solomon went out of his way to press home that advantage, as he strengthened his claim for the top spot. He took about 150 meetings with clients of the securities business over the past year or so, while seeing up to 200 corporate clients and spending time with the asset management division.

Moonlighting

He has also cultivated an off-kilter image, moonlighting as a DJ on the electronic dance music circuit in New York and beyond, using the stage name DJ D-Sol. On his Instagram account last summer, he posted a picture wearing a T-shirt and pink cap with the caption: "Great fun this weekend spinning at Nipper's in Great Guana Cay."

Mr Schwartz, who will leave the bank next month, has not said publicly what he plans to do next. But the black belt in karate may not lack for offers. Jon Winkelreid, a former co-president elbowed aside by Mr Cohn in 2009, is now the co-CEO of TPG, the private equity firm. Tom Montag, a former co-head of Goldman's securities business who left in 2007 after 22 years with the bank, is chief operating officer at Bank of America.

“There are lots of successful people who got the silver medal,” says one senior insider at Goldman. “Harvey will be OK.”

– Copyright The Financial Times Limited 2018