Interest rates soar above 5%, pressuring profits. Partners head for the exits. A leader faces scrutiny.
This is Goldman Sachs (GS) in 2023.
But it was also Goldman Sachs in 1994, when surging rates from the Federal Reserve sent bond prices tumbling. An unexpected resignation of the top boss created a leadership crisis that would roil Goldman through the end of the decade.
The current uproar surrounding Goldman CEO David Solomon is nothing new for a storied Wall Street firm that has wrestled with one crisis after another in the firm’s 154 years.
One boss died from a stroke while on the job, while another was ousted following a disastrous investment. A third left as the result of a bad relationship with a key deputy and a boardroom coup.
Solomon, who took over nearly five years ago, now takes his place as the latest chief to go under an extreme microscope after reporting the firm's lowest quarterly profits in three years. He is wrestling with everything from job cuts and a global investment banking slump to reports of partner unrest.
Goldman’s stock is down 7% so far this year. It has outperformed Bank of America (BAC) and Citigroup (C) while underperforming Morgan Stanley (MS) and JPMorgan Chase (JPM). The KBW Nasdaq US bank index (^BKX) is down 21% for the same period.
Since Solomon became CEO in October 2018, Goldman's stock is up 43%. That is better than all Wall Street rivals except Morgan Stanley. The KBW index has fallen 24% over the same time.
It is too early to know whether the CEO and Goldman can convince investors (and partners) that the company is on the right path. Solomon is attempting a tricky retreat from a costly push into consumer banking while also waiting out a tepid stretch of dealmaking.
"What I would expect and suggest is that 2023 is a lost year for Goldman Sachs," said Gerard Cassidy, a banking analyst with RBC Capital Markets. “Whether they do it in the third or fourth quarter, they need to clear the decks for any more write-offs or additional problems."
Author William Cohan, who wrote a 2011 book about Goldman titled "Money and Power," said "if the third quarter isn’t better than the second, it could be trouble."
Here is a closer look at how past crises tested the top ranks of Goldman:
1994
The turmoil that began in 1994 is perhaps the closest parallel to now. Rising rates from the Fed starting in February of that year sent bond prices plunging, triggering trading losses of more than $100 million a month for Goldman, according to Cohan's book. At the time it was a private firm still owned by its partners.
Some of those partners began heading for the door. "Almost everybody I know at Goldman is grumbling," one executive told The New York Times that year. "Everybody was freaking out then," Cohan said.
Goldman in its own corporate history described 1994 as "a year of challenge and change," citing severe downturns in bond and currency markets that created losses in its J. Aron and fixed income divisions.
"In the wake of these losses, the firm saw an unusually large number of partners retire, taking their capital along with them."
Then at a partner meeting in September 1994, Goldman boss Stephen Friedman surprised other senior bankers and much of the industry with an announcement that he would be retiring as head of the firm without a clear succession plan in place, according to Cohan's book.
Friedman declined to comment on the matter.
He and the management committee chose Jon Corzine and Henry Paulson to succeed him later that year — but not as equals. Corzine would be CEO and Paulson would be his deputy, as COO.
1999
There was one big problem with the new leadership structure at Goldman. Corzine and Paulson didn't get along.
Corzine and Paulson got through the losses of 1994 by cutting costs, including 1,000 employees. Profits dropped 80% for the year, and 40 senior executives left, according to a regulatory filing in 1995. By the second half of 1995 the business had turned around.
But in the latter part of the decade Paulson became increasingly irritated by Corzine's overtures to other firms, including JPMorgan, according to Cohan's book.
The breaking point was when Paulson caught word of discussions Corzine had with the head of Mellon Bank in Pittsburgh.
Management committee members were irate, according to Cohan's book, and prevented Corzine from having any such discussions in the future, handing that responsibility to Paulson. Paulson threatened to leave if Corzine remained in charge, and a majority of committee members asked that Paulson take over.
In 1998 they started sharing power, but that didn’t last long. In January 1999 came the surprise announcement that Corzine would be leaving and handing full control to Paulson.
"The biggest single factor here is that the two guys really did not get along with each other," one anonymous partner told The New York Times after Corzine's exit that year. "Hank and Jon are not friends."
Both Corzine and Paulson declined to comment on their time at Goldman Sachs.
1929
The most existential threat to Goldman's existence came during a calamitous stock market downturn that roiled the US economy and ushered in the Great Depression.
The "great crash" in 1929 crushed a Goldman investment trust that had pooled investors’ capital in order to invest in stock, called the Goldman Sachs Trading Corporation (GSTC), that had 42,000 shareholders.
GSTC had been created the year before by Waddill Catchings, a risk-taking executive from Tennessee who had become the first senior partner outside of the Goldman or Sachs families.
The stock of GSTC, which had peaked at $326, plummeted to $1.75 a share in October 1929.
"It could have ended Goldman Sachs right then and there," John Rogers, a chief of staff to four Goldman CEOs, said in a video Goldman produced for its 150th anniversary.
The other partners decided Catchings should leave in 1930. During a Securities and Exchange Commission hearing seven years later, Catchings said GSTC lost $289 million between 1928 and 1932. That would be $5.1 billion today when adjusted for inflation.
1976
Tragedy struck the corner office in 1976 when senior partner Gus Levy had a stroke and died while at a meeting.
When it happened, there were no plans in place for a successor.
But Whitehead told Reuters he never saw the letter. He and Weinberg, he told Reuters, proposed that they take over and share power equally.
“It was a very short period of people not knowing,” Whitehead told Reuters.
2008
A severe downturn in 2008 triggered by the collapse of the US housing market created a type of crisis that Goldman's leaders hadn't experienced in decades: political blowback.
The reason: eye-popping profits.
While it did lose $2 billion in the final quarter of 2008, its first loss since going public in 1999, Goldman earned a then-record $13.4 billion in 2009 while many of its rivals still struggled. It also received billions in aid from the US government, as many banks did, to get through the period.
The next year it found itself at the center of a firestorm in Washington as the SEC sued it for fraud, alleging that the firm misled investors about a complex security linked to the mortgage market.
The scrutiny led to fireworks before a Senate committee in 2010, where CEO Lloyd Blankfein defended the firm against accusations that it didn't disclose enough to its clients.
"And you want people to trust you?" Senator Carl Levin said to Blankfein, who answered: "Senator, I think people do trust us."
"Why, I wouldn't trust you," Levin added.
Blankfein survived that scrutiny and handed the reins to Solomon in 2018. The New York Times reported that Blankfein, in a June 2023 phone call with Solomon, offered advice and even to return to Goldman in some capacity.
Three days after the article appeared, Blankfein told CNBC that he had been "misquoted" and that he couldn't see himself going back to Goldman.
"My conversation with him was, I offered to be helpful," Blankfein told CNBC. "I never used the word 'return.'"
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