It is bad enough when things go wrong, but even worse when your old rival is doing better. So it was for Goldman Sachs this week when the iconic Wall Street investment bank announced bad financial results and its share price fell sharply, while that of Morgan Stanley jumped.
Morgan Stanley’s chief executive, James Gorman, could not resist a victory lap, listing among businesses “we don’t like to own” credit cards and personal loans, on which Goldman has lost $3bn in a flawed effort to diversify. David Solomon, his Goldman counterpart, pleaded: “We are not married to things. We’re willing to change.”
Marriage to Wall Street worked for Goldman for a long time. It had a purity and single-minded vision that were not always likeable but tended to be extremely profitable. Like Apple, Coca-Cola and Tesla, there was no mistaking what Goldman produced, and it did so very effectively, apart from the occasional financial crisis. Love or hate it, it was a fearsome machine.
But Morgan Stanley has pulled the PepsiCo trick on Goldman: Coke beats Pepsi in selling soda but PepsiCo has an equally large business in salty snacks, having merged with Frito-Lay in 1965 and expanded since. Morgan Stanley’s equivalent of snacks is wealth and investment management, which investors rate because it is steadier than financial trading.
There is history here. Goldman worked its way up from being a humble commercial paper dealer to rivalling Morgan Stanley, the poshest Wall Street underwriter. Others such as JPMorgan, from which Morgan Stanley split in 1935, have also risen. But ask most people to name an investment bank and the reply is “Goldman Sachs”.
Purity is appealing and while Goldman was a private partnership, it could decide its own destiny. Since its partners preferred the roller-coaster ride of investment banking to retail broking, that was it: they did not need to play safe, like Morgan Stanley. But when Goldman went public in 1999, it put itself in the hands of shareholders, who are now unimpressed.
It is hard to change a business radically. There was a horrible culture clash between old and new in finance after Morgan Stanley merged with Dean Witter Discover, the retail broking and credit card group, in 1997. “I have never forgotten how bad I felt back then,” John Mack, Morgan Stanley’s former chief executive, wrote of that angry period in his autobiography.
Such blow-ups are common, as Solomon noted this week. He should know: he used to be a mergers and acquisitions banker, and Goldman was paid $58mn for advising 21st Century Fox on its $71bn asset sale to Disney in 2019. Goldman extracted such a high price that Nelson Peltz, the activist investor, last week attacked Disney for leaving itself with a “balance sheet from hell”.
But the risk is sometimes worthwhile, especially when the alternative is untenable. It took a long time and many detours for Morgan Stanley to stabilise — Mack’s resignation and return, the bank’s near-failure in the 2008-09 financial crisis, and other wealth management acquisitions — but it has outflanked Goldman’s attachment to tradition.
It helps that the heart of the person in charge is not pledged to the old ways of Wall Street. Unlike Goldman chief executives such as Solomon’s predecessor Lloyd Blankfein, Gorman did not come up in banking as a bond trader or an M&A banker. He ran Merrill Lynch’s retail broking business for a while, and before that worked as a strategy consultant at McKinsey & Co.
Satya Nadella, Microsoft’s chief executive, is equally unsentimental about adjusting to what investors prefer. Instead of the head-on rivalry with Apple and Google that defined Microsoft under its co-founder Bill Gates and his successor Steve Ballmer, Nadella has moved towards the steadier business of cloud computing.
This feels like the natural order: when there are two rivals, one will often compete traditionally and the other by adapting itself. Both approaches can work: Coca-Cola and PepsiCo remain close competitors, and Apple and Microsoft are among the world’s most valuable companies. There is room for diversity in business strategy.
That should be comforting for Goldman, which is not in trouble, after all. It made solid profits on net revenues of $47bn last year and is, with JPMorgan, at the top of the league tables over which bankers obsess. Some of the reputational damage it sustained in the financial crisis has repaired.
But the crisis also showed that investment banks were fragile and needed to become more stable by reaching beyond Wall Street. Morgan Stanley restructured fast, while Goldman remained cautious, gradually launching Marcus savings accounts, Apple and GM credit cards, and US online loans, with poor results. It trod carefully but still contrived to mess things up.
You might think an investment bank that employs thousands of M&A bankers and corporate finance specialists would know the answer, but Goldman seems to be better at advising others than helping itself. If all else fails, it could follow its rival.