Goldman Sachs executives ‘as riled up’ as ever amid mass layoff announcement: Reporter

Semafor Business and Finance Editor Liz Hoffman joins Yahoo Finance Live to discuss the anxieties surrounding the banking industry as Goldman Sachs announces layoffs in 2023, David Solomon's performance as CEO, and the outlook for executive bonuses.

Video Transcript

SEANA SMITH: Goldman Sachs CEO David Solomon warning to staffers that job cuts could be coming next month or are coming next month. Solomon making the announcement in a memo to staff. Yahoo Finance has learned that the cuts could be up to 8% of Goldman's workforce. Our next guest got the initial scoop on the story, and she joins us now. We want to bring in Liz Hoffman, Semafor's business and finance editor. Liz, it's great to see you again. So let's talk about these cuts because as many as 4,000 jobs could be on the line. What can you tell us just in terms of the details of the cuts and what divisions they're likely to come from?

LIZZ HOFFMAN: So it's going to be across the firm. You'll see them especially deeply in consumer banking. Goldman has spent the last five or six years trying to become a major Main Street banking player, and it really hasn't worked. And they're sort of dialing back a lot of that ambition. Part of this is just the head count sort of exploded over the last three years. They've added 10,000 or 11,000 people. Some of that is laying off the annual layoffs.

During 2020, it was fairly insensitive to be firing people. Last year, everyone on Wall Street was making so much money, they didn't have to. So a little bit of just kind of yearly housekeeping, but this is the deepest cuts I can ever remember at Goldman. I've been covering the firm on and off for almost 10 years. They didn't even cut this deeply during the financial crisis. So this is a serious round of layoffs.

JARED BLIKRE: How much of a black eye is this for the CEO David Solomon? Because you compare him to Lloyd Blankfein, the previous CEO, who almost seemed untouchable. This is a relatively new venture. Is this an admission of failure for the bank? Is this-- was it simply a case of bad timing? What's your view?

LIZZ HOFFMAN: I would start by noting that Lloyd ran a very different firm than David does, a very different Wall Street, very different environment. But yeah, this is a black eye. I mean, look, they were recommitted to the strategy not just six or eight months ago. So, and, you know, what I've been hearing in the last couple of weeks is that the numbers that are being floated individually for layoffs keep getting bigger, which suggests to me that not only is there a hole, but that they're still getting their arms around how big it is. So this is a real black eye, I think, for the administration there.

And they're going to have to work hard, I think, to win back the trust of certainly senior partners. Goldman, as you'll remember, has a partnership, which is sort of in name only, but is this unique power center that CEOs at the firm do have to contend with in a way that the CEO, Jamie Dimon, doesn't. And they're about as riled up as I've ever seen them.

SEANA SMITH: Yeah, and Liz, going off of that, just in terms of some of the questions that you think Solomon and the top executives at Goldman Sachs are going to face just about his strategic vision for the firm, given what's happened to Marcus over the last couple of years.

LIZZ HOFFMAN: So the next six or eight weeks are going to be incredibly fraught for David. You know, he's going to start the new year with layoffs, serious layoffs. He's going to announce fourth quarter earnings, annual earnings, which, from a top line perspective, will be very good, $48, $49 billion. They're looking at their second best ever year of revenue. But you're going to see huge losses in consumer. I'm told also very sizable losses in asset management that are really going to bring down the P&L for the year.

So you're going to have earnings that aren't really going to impress anybody from a bottom line perspective. The next day, they're going to hand out bonuses internally that are going to be largely disappointing. You know, then David is going to go and host a partner retreat in Miami, where he's going to have to defend and lay out his go forward plan to the 450 or so partners at the firm.

And then he's going to come back to New York and do an all day investor presentation, where he's going to have to make the same sort of promises and commitments to shareholders and say, listen, I know I was up here six months ago, a year ago, two years ago, telling you that the plan we had was the right one. Turns out it isn't. So look, David is a pretty deft manager. He's, I think, well respected by shareholders. He's certainly tilted the balance of the equities at Goldman more towards public stockholders since he took over than from internal constituencies. So he has a little bit of goodwill there, but this is a tightrope he's got to walk very carefully over the next two months.

JARED BLIKRE: Could you compare Goldman Sachs to Morgan Stanley for us? I'm looking at the returns there. It looks like Goldman Sachs is down 10% for the year, Morgan Stanley actually down a little bit more. But you could say-- you could make the case that Morgan Stanley is trading above Goldman Sachs in terms of its book value. There are various metrics here.

The reason I choose Morgan Stanley, of course, is because Goldman Sachs in a very similar situation. Both of them converted to bank holding companies over the global financial crisis. They didn't have that retail depositor base. Morgan Stanley went a different direction. Both were [INAUDIBLE] deposits at one point. How have their paths diverged? And is Morgan Stanley now being seen as perhaps a winner?

LIZZ HOFFMAN: Absolutely. I mean, these are the two old legacy investment banks. They do still see each other as really fierce rivals in a lot of their businesses. But they almost don't bear any resemblance anymore. Certainly, both have big trading franchises and big merger franchises. But to your point-- and I don't know where the numbers are today, but Morgan Stanley trades at 1.6, 1.7 times its book value. Goldman is at about 1.1 or 1.2.

And that really reflects investors' comfort level with Morgan Stanley. Morgan Stanley has gotten very big into these very safe, fee-based businesses. When James Gorman took over after the financial crisis, he said the future is money management, right? You just manage trillions of dollars. It's very sticky money. And you take 50, 75, 100 basis points right off the top every year. You know, and they've got $4 or $5 billion of profit when they turn on the lights on January 1 in that business.

So, you know, I wrote a story for the Wall Street Journal about five or six years ago, looking at the legacy of that conversion, as you noted, to the bank holding company status, which really saved those two firms in 2008, gave them access to very cheap government loans. And I think I said they've both come to Main Street, but they're walking down different sides of the street. And you're really seeing now which route shareholders prefer.

SEANA SMITH: And Liz, let's talk about what this all signals for 2023, because right now, we have banks slashing headcount. Goldman by far the most, at least, up until this point. But they're far from the only bank that has signaled or has said that they are going to be laying off workers or instituting a hiring freeze. And then of course, we also had the reports that bonuses could be slashed 30% to 40% for this year. What do you think this tells us about the year ahead for Wall Street?

LIZZ HOFFMAN: Well, I think it's important to put bonuses in the perspective of revenue, right? So you're going to see bonuses come down 20%, 30%, 40% across different businesses. Most of these firms allocate bonuses based on, one, how did the firm do? Two, how did your division do? And three, how did you do? And so it's some waterfall. You know, and a lot of these firms had terrific years. And so you'll see it a little more in line with revenue. I would expect the cuts to be deeper at Goldman. We had reported that the partner bonus pool, which is entirely discretionary, set by David Solomon and his top deputies is down 50% this year.

You know, and it's important to note that the last time I think, when I talked to people, that they were sort of this dyspeptic was 2008. But that was really-- that was an industry problem, right? It was across the street. And frankly, Goldman weathered it better than almost anybody. This is not that. This is a little bit of an own goal. And so I think there's only so much money to go around when you have these deep losses and these growth businesses. And David has made the decision to try to share a little more of that with public stockholders and get the return on equity up with the thinking that if the stock price goes up, it's good for everybody. But getting it there and dialing those levers up and down at the same time is very tricky.

SEANA SMITH: Certainly going to be at least challenging first half of the year for Wall Street. Liz Hoffman, as always, thanks so much for joining us here on Yahoo Finance today.