Lehman Brothers was a legendary Wall Street partnership before a civil war over bonuses between its bankers and traders forced its sale to American Express in 1984 and led to its fatal failure a generation later in 2008. Morgan Stanley’s merger with a retail broker Dean Witter in the late 1990’s also triggered a civil war among its partners and the return of the wham-bam leveraged gunslinger John Mack, who almost wiped out its capital in the MBS meltdown.
Citicorp was once the most valuable New York money centre bank on the planet, as much a symbol of Pax Americana as Coca Cola and Hollywood. But a succession of power-crazed CEOs who were as imperial as they were incompetent led to the bank’s failure and bailout by Uncle Sam. Citi now trades at 6.4X and a price to tangible book value of a pathetic 0.7X, a banking Cinderella.
A civil war and palace coup is now brewing against Goldman Sachs (GS), once human history’s ultimate temple of money. CEO David Solomon is a target of a partner’s revolt that I do not believe he can possibly survive. Why?
One, Solomon’s mandate when he succeeded King Lloyd as CEO was to replicate Jamie Gorman’s transformational deal-making and diversification success at Morgan Stanley. He has failed in this mandate. Goldman relied on volatile investment banking, trading and FICC (the biggest hedge fund in the Milky Way that just happened to be listed on the NYSE) for two thirds of its bottom line when Solomon became capo di tutti capi in 2018. Yet Solomon could not deliver a mega deal in asset/wealth management remotely comparable to Gorman’s big game trophies: Smith Barney, E-Trade and Eaton Vance. So Gorman’s MS trades at 14X while GS still languishes at a pathetic 9.5X and just a tad above book value. Scott Fitzgerald, the literary king of Jazz Age New York said, there are no second acts in American life. This was never truer than at the pinnacle of the Wall Street power pyramid.
Two, Goldman is a unique beast since, 25 years after its IPO, its 400 partners and even former partners still wield power in their fiefdoms. Solomon made the fatal mistake of ignoring their concerns on strategy and culture. His decision to merge merchant banking and principal investing divisions triggered fierce turf battles among powerful partners, the cardinals of GS who will not hesitate to commit regicide. Solomon’s public gigs have enraged partners who think it is bad for GS’s stuffy, elitist culture. Solomon does not pass the old guards sniff test since he was never a GS partner and began his career at the déclassé Bear Stearns along with his consigliere John Waldron now COO.
Three, Solomon’s strategic moves have been an unmitigated disaster. He doubled down on the Marcus consumer banking platform that has now cost GS $4 billion in losses. His decision to buy GreenSky was another billion dollar fiasco. A capo who fails the Family gets whacked. No different on Wall Street. I am long GS as the next palace coup is imminent.
