Why Goldman Sachs Could Be Wall Street’s Biggest Winner Under Trump
Lloyd Blankfein has always been a big worrier. At Harvard, the future CEO of Goldman Sachs gs worried that he wouldn't be able to match wits with the prep-school students who seemed light-years more savvy than a little kid from an outer borough of New York City. "I was as provincial as you could be," he once told me, "albeit from Brooklyn, the province of Brooklyn." He worried at Harvard Law School. He worried at Donovan Leisure, the law firm where he worked as a tax lawyer. And he worried at J. Aron & Company, the commodities dealer Goldman Sachs had bought in 1981, the year before he joined it to trade gold--a task for which he had very few qualifications.
Blankfein, 62, has been the chairman and chief executive of Goldman since June 2006, when Hank Paulson left to become Treasury secretary, and he's still worrying. He is hopeful that tax and regulatory reform--if it can be achieved amid the immense turmoil in Washington--will help propel Goldman back to its customary place as Wall Street's most ruthlessly efficient profitmaker. But as usual he doesn't know for sure what will happen, and so he worries. "Gee, I hope I don't look back five years from now and say, 'The last 10 years were the Golden Age,' " he says. "That would be bad. But who knows? When they had the 40-day flood, on the third day, they said, 'Boy, that's a lot of rain! It can't last much longer.' So who knows?"
It has certainly been a tumultuous decade or so, both for Goldman and for Blankfein himself. There was the financial crisis of 2008, of course, and the regulatory reckoning that came after--including the Dodd-Frank reform bill and the Volcker Rule, which greatly inhibited the highly profitable proprietary trading that Goldman had always seemed to do better than anyone else. The investment bank was memorably derided by Rolling Stone as a "great vampire squid wrapped around the face of humanity." And Blankfein himself was relentlessly pilloried for a quip that Goldman and its peers were doing "God's work." More recently, Blankfein has faced a serious health scare: He was diagnosed with lymphoma in 2015 and spent months undergoing successful treatment. His doctors say the disease is in remission.
The professional and personal crises may have receded. But Blankfein now has a whole new set of reasons for anxiety.
To begin with, his longtime No. 2, Gary Cohn, recently left the firm to go to Washington as President Trump's national economic adviser, necessitating the most significant management reorganization at Goldman in a decade. Goldman's bigger and better capitalized banking competitors, such as JPMorgan Chase jpm , Bank of America bac , and Wells Fargo wfc , are churning out record or near-record profits, while Goldman Sachs is still trying to find its footing in a regulatory environment that has favored less risk taking than Blankfein's company is designed to accommodate. More than a few people on Wall Street, however, expect that Cohn and Treasury Secretary Steve Mnuchin, another Goldman alum, will find a way to ease back on the regulations.
Meanwhile, Goldman's longtime rival, Morgan Stanley ms , is winning the plaudits of industry analysts who view its acquisition of Smith Barney as a savvy move into the less volatile fee-based money-management business. This even as Goldman is still betting that investment banking and trading will once again return to prominence on Wall Street. "Unlike Goldman, whose strategy has been a little bit, 'Let's just wait it out and the world will come to where we want it to be over time,' Morgan Stanley's strategy has been, 'Let's take the bull by the horns,' " explains Guy Moszkowski, who has been a Wall Street research analyst for decades and now is the managing partner and director of research at Autonomous Research.
Then there's the rising threat from the so-called fintech industry, the growing number of Silicon Valley-based financial businesses that are using the Internet to disintermediate the work that Wall Street has done spectacularly well for centuries: putting people who have money and want to lend it or invest it in direct contact with the people who need to borrow it or want to use it to start or grow businesses. The threat remains a marginal one for now, as the startups are primarily picking off low-hanging fruit in credit card and student-loan markets. But the days of fintech companies underwriting stocks and bonds and making corporate loans--the bread and butter of Wall Street--may not be too far away.
These concerns were magnified in April by current events, when Goldman announced disappointing results for its first quarter of 2017. In bond trading--an area where it expects to rule--it reported shockingly anemic revenue growth (1%) compared with strong double-digit gains by its major banking rivals. That got Wall Street worrying too: How had mighty Goldman managed to fumble so badly, investors and analysts wondered, when all of the other banks were raking in profits thanks to the long-running Trump rally? What happened? After reaching an all-time high of nearly $253 a share in March, Goldman's stock fell to around $212 at the beginning of June.
It's beyond premature to begin writing off Goldman Sachs. With $37.7 billion in revenues for 2016, Blankfein's company ranks No. 78 on this year's Fortune 500. The bank earned $7.4 billion in profits on those sales, a 22% gain over the year before. Goldman remains a formidable force in global markets. And with Cohn and Mnuchin in positions of considerable power in the Trump administration--as well as Dina Powell, another Goldmanite who is serving as Trump's deputy national security adviser for strategy--it appears to many on the outside that "Government Sachs" still effectively rules the world.
But it is certainly fair to wonder if Goldman is well positioned for the realities of today's Wall Street--flanked as it is on one side by much larger traditional banks and on the other by nimbler startups. Does the bank known for always being first to see the next big trade still have what it takes?
At least one savvy investor, who owns some $2.5 billion worth of Goldman stock, urges calm amid the roiling seas. "I'm not much for prognostications," emails Berkshire Hathaway CEO Warren Buffett from Omaha, "but one thing I'm close to 100% sure about--whatever the twists and turns there may be in regulation, technology, and markets, Goldman will successfully adapt. I've watched them do it for decades."
The news reverberated around Wall Street. When, in September 2015, Blankfein announced he had a "highly curable" form of lymphoma, there was understandable concern--not just for the CEO himself but also for the future of the bank. Would Goldman soon have a new leader? Would Cohn be his successor, as everyone assumed? Or would the Goldman board of directors reach deeper down to find a younger leader, as it did when the board selected Blankfein to succeed CEO Paulson instead of Paulson's seemingly designated successors John Thain and John Thornton? For much of 2016, it was Wall Street's favorite parlor game.
In a recent interview in his 41st-floor office, overlooking New York Harbor, Blankfein tells me that for a "long time" during 2015 he wasn't feeling well and that "in hindsight" he had symptoms he could "explain away." Then he jokes, "And anything I can explain away, I do."
For instance, he was losing weight. "But I'm always trying to lose weight," he says. "I just thought I was unusually successful." In fact, he says, he thought he had hit upon a new diet. He began proselytizing. "I started giving people advice on how to lose weight, because I was so successful at it."
Then he developed a cough. "It was in the summer," he says. "I thought I had allergies." Then came the aches and pains. "I was exercising," he says, and he thought he was just sore. "I just had these things, and then they started accumulating." He remembers how he'd been walking with some people and told them to slow down. "And they said, 'No, Lloyd, you're walking slow, and you've been walking slow for a long time,' " he says. "Literally, that's what happened." He went to the doctor, who told him that in two more weeks he wouldn't have been able to walk anymore. He had 75 tumors, and they were growing.
He scheduled a biopsy for Sept. 16. Usually such surgeries are done first thing in the morning. But Blankfein had already committed to speak at a Wall Street Journal event at the Pierre Hotel in Midtown Manhattan. In his interview that day with Gerard Baker, the editor of the Journal, Blankfein looked wan and a bit peaked but was otherwise lucid. He was asked, among other things, about the growing popularity of Donald Trump. Blankfein, a Democrat and a longtime supporter of Hillary Clinton, said that some of Trump's statements were "wacky" and the thought of Trump "with his finger on the button blows my mind." Before nearly anyone else, Blankfein drew a parallel between Trump and Andrew Jackson, a comparison that Trump now makes himself. (Trump has put Jackson's portrait in the Oval Office.)
Blankfein was in the hospital when his doctor got the biopsy results. "You're going right up to chemo," he told Blankfein. While the PICC line was in, Blankfein informed the Goldman board of directors of his diagnosis. And then he arranged for a call with his management team. While those calls were being made, the doctors were performing a painful bone-marrow biopsy. "But I was so involved [with the calls]," he says, "I didn't even notice it."
Goldman released a statement about Blankfein's illness. It said he would undergo months of chemotherapy but still be able to lead the firm, albeit on a reduced schedule. During chemotherapy, he didn't feel that sick. "I had one bad week," he remembers.
If somebody said to me that it’s time to leave, I would understand that. Nobody’s fired me yet. --Blankfein
He was more concerned about getting an infection that might kill him. In the days after the chemo, his white blood cell count fell to nearly zero. He walked around the office carrying a thermometer, because taking his temperature repeatedly was the best way to figure out quickly if he'd become infected. "If your temperature goes over 100.4, you've got to go to the hospital," he says. Already mostly bald, Blankfein lost his eyebrows. "I can show you pictures," he says. "It looks weird. I looked like Lex Luthor at the end of winter." People told him after he was diagnosed that he hadn't looked so great for a while. "Well, why didn't you tell me?" he asked them.
The chemotherapy worked. Blankfein says his cancer is now in remission. "I think I'm okay," he jokes. "The problem is, by the time I'm sure I'm okay, I'll be so much older that I'll have that as a problem. So it's like, there's not going to be any peace in this, for me."
His eyebrows have grown back. And so has a little bit of his paunch. (As we spoke, he finished off a bottle of Stewart's sweet orange soda, not the easiest thing to find in Manhattan.) His sense of humor is as wry and acute as ever. "You should really be sympathetic, by the way," he tells me after we get done talking about his illness.
It is clear now that Blankfein is not going anywhere soon, just as Jamie Dimon, the chairman and CEO of JPMorgan Chase, seems more entrenched than ever following his successful bout with throat cancer two years ago. Indeed, Blankfein is now the longest-serving CEO on Wall Street. (And the second-longest-serving leader in Goldman's illustrious history, behind only the legendary Sidney Weinberg, who died in office in 1969 after 35 years at the top.)
Healthy and focused, Blankfein seems determined to steer Goldman through what is shaping up to be an important inflection point in the industry: The economy is growing stronger, unemployment is low, and interest rates remain low. Assuming that Washington pulls back on regulation, Wall Street should be poised for boom times.
Blankfein's vision for the future of Goldman, not surprisingly, does not stray far from what has made the firm the envy of nearly every financial institution on the planet. He still wants Goldman to be the financial intermediary of choice, especially when the problems are complex. And he expects that it will still be Wall Street's leading investment bank.
"We're an adviser," he explains. "I don't think advice has gone out of style. We're a strategic adviser. We manage risky assets for our clients in private equity and in our asset-management business. And we're a financier, and usually a financier of choice. The more complex and difficult a financing situation becomes, the more likely we'll get the call to work on it."
He believes that not only will there continue to be demand for these complicated financing solutions domestically, but that there's also a growing need for Goldman's services in developing economies such as those of China and India. "And we've always had a very good foot in the door in those places, so I feel good about that."
Despite increasing pressure on fees as investors move away from actively managed accounts to passive investing, Blankfein also seems pleased with the progress being made at Goldman Sachs Asset Management, where assets under "supervision," as Goldman calls it, have increased to $1.375 trillion, from $1.275 trillion a year ago.
Goldman's problem in recent years, Blankfein says, is that its businesses "still correlate with growth," and the world--China aside--has been in an extended slowdown at the same time that Wall Street has endured the "relatively heavy-handed" way that new regulations have been implemented.
There has been a lot less risk taking in recent years, says Blankfein, because people are afraid of losing money. Or they're worried they'll be accused of violating the Volcker Rule or otherwise using capital in a prohibited way. "Somebody will say, 'This was a risk that you shouldn't have been taking,' " he says. "There are layers and layers of stuff that made people very, very cautious and very, very risk averse."
He says Goldman's challenge is how to make money with the tools in its control. "Where is growth?" he wonders. "What are you going to do to get higher growth?"
Ironically, at the moment, one answer for Goldman seems to be in lending money to consumers and small businesses--an activity that harks back to the days when Marcus Goldman bought receivables at a discount from the vendors around Wall Street in the 1860s. "We're a bank, we should act like one," Goldman told the Wall Street Journal in February.
So after shunning the public for most of the past 148 years, Goldman is embracing the loan business--in its own way. "We have the opportunity to build a higher-margin lending business because we're not competing in the league tables where people already have $2 trillion worth of loans on their books," he says. "If we got an incremental $100 billion of the best kind of lending business out there, it would be accretive to what we're doing. We don't need to do it, because nobody thinks that's our core business."
To make it happen, Goldman is even getting a little fintech-y. In 2016 the firm created Marcus, a part of its new online retail banking service, which makes no-fee loans of up to $30,000 to individuals seeking to refinance their high-priced credit card debt with a small, lower-cost loan from Goldman. So far Marcus--named after the firm's founder--has made loans totaling about $1 billion in its first six months. Blankfein says that because Goldman doesn't have a legacy consumer business or bank branches, its technological expertise allows it to tailor its products to individual needs. Since the loans aren't being securitized and sold off to investors, he said, "We can make it almost bespoke." That means borrowers can pick the term of the loan, the monthly payment amount, and when they start making payments.
Furthermore, Goldman's diminutive Salt Lake City-based commercial bank, known as Goldman Sachs Bank USA, is now suddenly eager to get your money, also through the Internet. To do so, the bank is offering depositors an interest rate of 1.05%, some four times or more what rivals JPMorgan Chase and Bank of America are offering. Goldman's commercial bank now has deposits of around $125 billion--a mere fraction of Chase's $1.4 trillion, but up considerably from Goldman's $28 billion in 2008.
If Goldman's "toe dip" into the waters of consumer lending works out well, Blankfein expects the firm will do more of it. "Reaching a consumer digitally" through technological expertise plays to Goldman's strengths, he says. "If I assume that consumer experience is a weakness of ours, I'd say a strength of ours has been technology--digital platforms, algorithmic trading, and risk management," he says.
Whereas once upon a time Goldman was the largest full-service investment bank on Wall Street, in the wake of the financial crisis--which immolated Bear Stearns and Lehman Brothers--it has now become the smallest. It has assets on its balance sheet (as opposed to under management) of around $950 billion. Bank of America, which owns Merrill Lynch; JPMorgan Chase, which bought the lifeless Bear Stearns and ultimately folded it; and Wells Fargo, which bought Wachovia, each have nearly three times as much in assets as Goldman does. Its principal rival, Morgan Stanley, has around 100,000 employees, thanks to its acquisition of Smith Barney from Citigroup and its aggressive push into the brokerage business. Goldman has no brokerage business to speak of and has only around 35,000 employees.
Blankfein does not see Goldman making a further move into traditional commercial- and consumer-banking businesses. "We don't have a kind of regular vanilla banking business like a lot of firms do," he says. "We don't do that. And it would change the firm if we did, because then we'd be 225,000 people. We'd have branches. We would have cash management. It would be a different firm. Now, maybe it'd be a better firm, but that's not the firm that we historically have been or have aspired to. In a crisis, is it better to be bigger and have those activities and those diversified strains? Yes. But it's a different firm to manage. It's a different culture, too."
Blankfein is human, so on some level he is, of course, covetous of JPMorgan Chase's ability to produce $25 billion in annual net income year after year. But he is more focused on the return on equity that can be achieved from Goldman's mix of businesses, and less on the absolute dollar amount of Goldman's profitability. In a low-growth environment, such as we've seen the past few years, Blankfein says that having a huge loan portfolio such as Chase's can be stabilizing: "But there have been huge swaths of time--in fact, the predominant amount of time--where our returns were always much higher. And had we had that business, it would've pulled down our returns. So it depends on what part of the cycle you're in."
At the moment, he laments, Goldman's return on equity is 10%--below where he'd like it to be, certainly, and more in keeping with what the bigger commercial banks should be delivering to investors.
One way to goose Goldman's ROE, Blankfein points out, would be to reduce the capital that big banks are required to have. And--spoiler alert!--he thinks capital requirements are too high. "If we ran the same business with 25% less capital, we'd have a third higher ROE," he says.
The departure in April of Daniel Tarullo, the Federal Reserve governor who was Wall Street's de facto regulator-in-chief for the past six years, gives Blankfein some hope that those rules might be changing. Tarullo was the leading advocate of stricter capital rules on banks in the wake of the financial crisis. The consensus on the Street is that whoever President Trump appoints to succeed Tarullo will be much more understanding of the banks' point of view.
That's the bet that Steve Eisman is making. The veteran investor, a character in Michael Lewis's The Big Short who was memorably portrayed by Steve Carell in the movie version, is bullish on financials, including Goldman. Under Trump, he believes that the regulators will grade the banks' safety net "on a different curve," and the Volcker Rule will be relaxed. Banks will be able to buy back more stock and ease back into risk. "They'll have more leverage so the ROE will go up a lot," he says. "Goldman will benefit enormously from that."
A lot of Blankfein's focus today is on establishing his new leadership team. Cohn's departure necessitated a major restructuring. David Solomon and Harvey Schwartz, the new copresidents and co-chief operating officers, were selected to replace Cohn. Gregg Lemkau and Marc Nachmann have been named the new coheads of investment banking, moving up to replace Solomon. And R. Martin Chavez, an openly gay Latino man with Japanese tattoos on his arm, replaced Schwartz as chief financial officer. Chavez's appointment is as much a sign as any that Goldman is evolving with the times.
Blankfein says he doesn't think Trump chose Cohn, Mnuchin, and Powell just because they once worked at Goldman Sachs, although he takes it as a compliment. "I find it validating," he says. "It makes me feel good that he sees in those people the same thing I see in those people."
In a claim that will draw eye-rolling from some of his fellow Democrats, Blankfein says there's actually a downside for Goldman to having its alumni in Washington. "It was a lot easier for me to call Jack Lew [the former Treasury secretary] than it is to call Steve Mnuchin," he says. "It's in my head to be careful about it and to limit it." It was one thing during the financial crisis to be able to pick up the phone and talk to Paulson, which he did often, but now, "I'm much more sensitized that people are keeping score."
From a management standpoint, losing Cohn and Powell "makes some things harder and some things easier," he says. "Because every day we had people under Gary that wanted a shot. I wasn't dying to have [him leave], and I'm close to Gary and a lot of life here was organized around Gary's strengths and what he was good at and what he liked to do and his long-term relationships. All that has to be reoriented and replaced."
But his chief responsibility is to think about the firm's future leadership, and Blankfein says that became marginally easier with Cohn's departure. "You can keep somebody an extra two years," he says, "but you might lose somebody who was otherwise going to give you 10 more years. It's an ex post facto rationalization."
What about Blankfein's own future at Goldman? Couldn't it be argued that he is hanging on for a couple extra years, at the expense of the next person who will lead Goldman for another 10? (For what it's worth, the betting on the Street seems to be that after a few more years of seasoning, Harvey Schwartz, the little-known former chief financial officer, will be Goldman's next CEO.)
"Don't be shocked," Blankfein tells me. "I'm probably not going to stay forever. People have been handicapping my succession since my first day. But it's not anybody's job to leave their job prematurely, even though it might be my job to manage that succession, and it might be the board's job to manage me out, if it suits them. So I'll wait until it suits them. If somebody said to me that it's time to leave, I would understand that."
For now he might as well keep at it, though, because "nobody's fired me yet."
Indeed, all things considered, Blankfein is feeling pretty sanguine these days. He says that where once upon a time he spent 98% of his time worrying about things with a 2% probability, he's more optimistic now. "I'm feeling much better about things, so now it's 99% and 1%."
A version of this article appears in the June 15, 2017 issue of Fortune with the headline “Is Goldman Sachs Still No. 1 on Wall Street?”.