Following is the unofficial transcript of a CNBC exclusive interview with Goldman Sachs Chairman & CEO David Solomon on CNBC’s “Squawk Box” (M-F, 6AM-9AM ET) today, Tuesday, October 18th. Following is a link to video on CNBC.com:
Goldman Sachs Ceo Says Outlook Looks Uncertain
ANDREW ROSS SORKIN: Joining us in an exclusive interview is Goldman Sachs’ CEO David Solomon. Nice to see you sir.
DAVID SOLOMON: It’s nice to see you.
SORKIN: On set at the table.
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SOLOMON: Really happy to be here. Really, really happy to be with you on set.
SORKIN: We’ve been joking with you for years now that you’re an in person guy. So now it’s nice to see you in person.
SOLOMON: It’s nice to be in person. It’s nice to be with you.
SORKIN: So let’s talk about these numbers and let’s also talk about the other big headline that a lot of folks in Wall Street are talking about, which is this reorg of what’s happening inside the company but in terms of the numbers, better than expected. But there’s a lot of questions about what the future of this firm is going to look like so speak to it if you could.
SOLOMON: Sure while, on the numbers, you know, there is a challenging operating environment, certainly for capital markets centered firm. There has not been a lot of capital markets activity given the headwinds of economic activity, equity issuance, debt issuance has been slower.
M&A activity was still relatively robust, and I think strategic dialogues still remain pretty good at this point in time. Our clients were active though and the thing that I’m most proud of when I look at what our team has done over the course of the last few quarters, if you look at our market shares on our wallet shares.
We’re really, we’re really focused on our clients and we’re really doing well in servicing them and being there with liquidity and capability and financing in order to meet their needs what’s a very challenging time.
SORKIN: In terms of thinking of you though as a bellwether for the capital markets, what are you expecting in terms of the next like when you look out—
SORKIN: Over the next couple of quarters, what does it even feel like to you?
SOLOMON: I think it feels uncertain and, you know, I think there’s no question we’re tightening economic conditions relatively quickly. We’re reversing what’s been a very, very long period of relatively easy economic conditions.
And as you do that, at some point, there’s going to be a bigger impact on consumer behavior, on market behavior. I think we’ve started to see that, but I think until we have a better trajectory on the direction of economic activity.
It’s hard to really know where markets settle. So I think it’s time to be cautious. If you look at, if you look at what most economists are predicting, they’re predicting slow to no growth in the US.
They’re predicting negative growth across other developed economies in Europe. And so that environment having to 2023 is one that I think you’ve got to be cautious and prepared for.
SORKIN: To the extent that you have to place a bet on where to put your own business meaning is it trading where you think that the growth is going to come, I mean what, when you look out over the year to the extent there’s an opportunity if there is one, what is it?
SOLOMON: Well, I think there’s a lot of opportunity with our clients because our clients are resorting their position, given the fact that the world’s changed. We’re entering a period where there’s more embedded inflation.
Obviously, the Fed’s focus on taming that, but we’re shifting the economic environment materially, I think big businesses are looking at how they’re strategically positioned and saying, how do we adapt to that? Scale matters a lot in an environment like this.
People are shifting supply chains. It’s not that everything’s on shoring, but they’re thinking more strategically about certain supply chains. And so as you look ahead, and and think about that, I think our clients will continue to be active and where they are prepared to serve them.
But we don’t we don’t really think Andrew, we’re not looking quarter to quarter, we’ve got a leading investment banking business, leading global markets business.
We have an extraordinary asset and wealth management platform and all of those are set up to serve clients and this this reorganization of the way we’re organized really comes out of our one Goldman Sachs ethos to try to say how can we continue to position ourselves to serve our clients better.
SORKIN: So let’s talk about that because you’re gonna go from effectively four units to three. The markets business gets moved into the wealth management piece of things.
There’s this new platforms cloud unit that is going to encompass this sort of Goldman Apple and, and General Motors piece of the card business. Why break it up that way?
SOLOMON: So this is all really driven through through this client lens that I was talking about. One of the big things that we’re very proud of and we think it’s really had an impact on the firm’s performance over the last four years is the evolution of this one Goldman Sachs ethos.
It started four years ago with taking 30 clients and saying how can we serve them across the firm, break down silos, serve them very well.
It’s now expanded to hundreds of clients, but it’s really become an operating ethos in the firm and we’ve seen in doing that there are synergies between our banking and markets business, they’ve been operating increasingly close together over the course of the last couple of years.
And when we think about our investing platforms, across asset and wealth, we’ve wanted to really bring those together as we’ve been able to organize over the last few years and so that was the lens of really doing this.
The fundamentals really don’t change. The leadership does move to different places, but it’s the same leadership, a couple of people with different responsibilities, the financial targets are the same.
With respect to how we’re serving consumers, we really have had two businesses that we’ve been working on. One is a direct-to-consumer business. And that business we’ve learned a lot over the last few years.
SORKIN: And that’s the markets business.
SOLOMON: That’s the markets business. And one of the things we’ve learned is that our ability to align with our wealth business to go to consumers, and people that are already on our platform is a strength of the firm and that’s a better place for us to be focused than to be out massively looking for consumers.
We’re, we’re aligning it with wealth and then we have our partnerships like the big card and those are FinTech platforms. We’re embedded in somebody else’s ecosystem, and those operate differently and that’s a big opportunity for the firm.
JOE KERNEN: Does it indicate you’ve cooled at least a little on consumer? Is it retrenching just slightly and realizing you want to focus on what Goldman, what has made Goldman great for years and three years ago, looked like you’re really headed that way.
SOLOMON: I think I think we’ve learned a lot over the last few years, Joe. We, this is an important part of the firm and the most important part of it is we now have $110 billion of digital deposits, and we need those deposits as a bank, we had to diversify our funding.
That’s been a hugely important part of the journey. But as we’ve learned, the concept of really being broad, with a consumer footprint is not really playing to our strength. But when you look at our wealth platform, you look at workplace wealth where we have access to millions of individuals who are workplace wealth offering.
The ability to add banking services to that and align with that actually plays to our strength. And these partnerships are going to build FinTech platforms.
If you look at what we’ve done in Transaction Banking, you look at what we’ve done with the Apple card, this is actually a strength of ours and these are interesting platforms that we can be very focused on creating more transparency around.
SORKIN: What’s the chance that the Marcus brand doesn’t remain? Meaning that you you move and say, you know what, Goldman Sachs is the brand. That’s what works for us. That’s what we’re gonna do.
SOLOMON: Well, we’re moving, we’re moving, we’re moving in a direction of really amplifying Goldman Sachs. We had started when we started this, and again, when you’re innovating and you’re trying new things, you’ve got to be willing.
And I think that’s the strength of the firm, you’ve got to be willing to try things and then kind of look at the mirror and say, okay, this part worked, this part doesn’t work.
Let’s make an adjustment. So we started with Marcus by Goldman Sachs. Now if you look at the way it’s positioned, it’s Goldman Sachs Marcus, what’s the brand out there that everyone really knows, Goldman Sachs.
And so, you know, Marcus has some brand identity. We’re going to continue to work on our deposit platform. We’re going to continue to offer these banking services adjacent to our wealth platform, or that’s where our direct-to-consumer model will be.
It plays to our strength. It’s a much better customer acquisition strategy, you know, for us and we’re excited about these these digital FinTech platforms. And we think over time, we can show people that what we’ve built and what we have here is really unique. I think what we announced with Apple last week is pretty cool.
SORKIN: The high yield product.
SOLOMON: The highline enhancement that you are able to go onto your phone, go into Apple cash, and link over to a Goldman Sachs high yield savings account directly out of Apple cash. That’s, that’s, that’s another example of how when you get into these partnerships, and you get embedded in somebody’s ecosystem, and—
SORKIN: Can you talk about the margin of the deal with Apple because I think people have always wanted to understand the dynamic behind that transact, beyond that arrangement.
SOLOMON: Sure. Well, one of the one of the things that that you’ll see that we’re announcing today, and it’s in it’s in the it’s in the earnings release in the earnings script, which is now out is that we’ve extended our partnership with Apple through the end of the decade and made adjustments to it.
So one of the things that happened that’s very very interesting about the card is we went out and we saw the card experience. The deal was based on a partnership where there were assumptions, how people behaved with this card because the technology was different. We’ve now looked at that, and we’ve now renegotiated so the partnership really works for both of us as we go forward—
SORKIN: By the way, what was the lesson? Different in what way?
SOLOMON: I’m sorry.
SORKIN: You said, what was the lesson? Different in what way?
SOLOMON: People pay down, people, it’s actually good financial health people pay down their balances much more quickly. So when you think about a credit card, how does a bank make money on a credit card?
A bank makes money on a credit card because people have balances. If people are paying down their balances at a much faster rate, and you have more, less borrowers and more, you know, immediate payers, the economics are different.
And so there’s something about the behavior that you can click on your phone and immediately pay down that people are paying the credit card bills multiple times a month. That’s good financial behavior. That’s what you want.
So that was an innovation. We all looked at it. We modeled it differently. You know, who negotiates, who renegotiates a partnership before the partnership’s over and extends it in something like this—
BECKY QUICK: But meaning renegotiation had better terms for Goldman Sachs because you weren’t going to—
SOLOMON: Yes, it was, it was rebalanced because it’s an important partnership for Apple and Goldman Sachs and there’s a lot that we can do together. It’s a real partnership. We’re not just we’re not just someone supplying money here.
We’ve got technology that’s embedded in their ecosystem, and we’re trying to find ways to help people with their financial wellbeing and we’re, you know, we’re moving forward with that. So, it’s, it’s a very interesting platform.
And like anything else, we’re building something it’s new. The results aren’t immediate, but you know, think about Goldman Sachs. Let’s step back to the earnings at a high level, tough, tough operating environment.
Look at our performance are we on a relative basis to the people we compete with, we feel good about that. The firm’s performing, but we’re also making investments in some things that can allow the firm to grow over time, continue to position the firm competitively. That’s what we’re supposed to do.
KERNEN: You try things, if they work, they work, maybe take another look. Did, did remote hybrid work model that you view that as a success?
SOLOMON: Well, for Goldman Sachs, you know, I’ve talked about this actively. We have an organization where 50% of the people are in their 20s. They come to Goldman Sachs to learn, to meet people, to interact.
You know, for our organization, we had to do what we could do to bring people together, you know, on a reasonable basis as possible. And we’re, we’re kind of operating that way at this point. Before the pandemic, about 75% of our people were in the office on any given day of the week. Today, it’s about 65%. So we’re we’re kind of operating close to the way we were—
KERNEN: You want to get back to 75 or are you okay with 60?
SOLOMON: You know, I’d like to get back to the culture we had before which is people come to work, do their work, they live their lives, they have the flexibility to manage and and one of the things that was very interesting, Joe, when I looked at the data, and really looked at how things operated at the firm before the pandemic.
Iif you broke the firm into people in their 20s versus people in their 30s, 40s and 50s, I mean, they’re a couple of dinosaurs like me that are out of that, that entirely, but if you if you looked at, if you looked at the data, the people in their 20s generally came to work five days a week. That people in the 30s, 40s and 50s have more flexibility.
We’re moving around, they have responsibilities with their kids, etc. I don’t want rules. I want a culture where we show up, serve our clients. We work hard. We mentor our people, we teach our people, we strive for excellence. That’s what Goldman Sachs is all about. I want a culture that really promotes that. I don’t want a set of rules.
QUICK: Hey David, you are great at risk assessment and Jamie Dimon spoke about risk assessment last week and I think he concerned a lot of people in the market when he kind of said things that could play out.
He had one line that really caught my attention just saying if you need money, you better line it up now basically. If you need that liquidity, get it. When you look at the environment when you look at the market and what’s potentially out there, what do you see?
SOLOMON: Well, this goes back to what I said earlier, Becky, I I think it’s a time to be cautious. And I think that if you’re running a risk-based business, it’s a time to, it’s a time to think more cautiously about, your risk box, your risk appetite.
I think you have to expect that there’s more volatility on the horizon. Now that doesn’t mean for sure that we have a really difficult economic scenario, but in the distribution of outcomes, there’s good chance we could have a recession—
KERNEN: In 10 years? Did you see Druckenmiller?
SOLOMON: I, I think it’s hard to predict how far down.
KERNEN: The future is hard to predict, but we played it if we paid it forward, the Fed, do we have unfunded liabilities at the federal level that are going to impact whether we’re able to grow? Stan who knows but he said we may be unchanged in the S&P 10 years from now. We’ve had decades like that before.
SOLOMON: We’ve had decades like that before. I’m acutely aware of the fact that that if you put $100,000 into US stocks in 1970 and 1980, it was worth it was worth $50,000. So there’s no we’ve lived in a period really since I got out of school.
I got out of school in 1984. We lived in a period where there have been lots of speed bumps, but if you kind of held your breath for six to 12 months, we kind of marched ahead on this continuation of, you know, easier money, asset appreciation, you know, relatively quickly.
In an environment where inflation is more embedded and growth is slower, you know, asset appreciation will be tougher. Now, are we gonna get rooted in that kind of a decade long scenario?
I don’t know, the policy decisions we make from here, you know, will have an impact, you know, can we make, can we make better energy policy that can last across administrations? Can we make better immigration policy?
You know, can we can we find ways to do things that allow us to invest in our society in a way that make it easier, you know, to shift this and I don’t have the answers to that, but certainly we’re all going to focus on it. If you’re a risk manager, right now, I think you have to prepare for a more difficult environment in 2023.
SORKIN: Talk about raising capital, the IPO market is closed effectively. How long do you think that that lasts? How hard is it to raise capital in this market and as a result that you think you’re gonna see people taking companies private, not taking companies private? Do we also, how’s this all going to work?
SOLOMON: Well, I, you know, I think it’s fair to say the IPO market is closed. What I prefer to say is the world is still resetting its mindset as to, you know, what valuations are if you’re going to go public.
I, I’d mention it but I’m not sure that it’s out there yet. We have a relatively significant IPO that’s coming to market that I think is getting announced today. And just in the context of that the valuation perspective is a different valuation perspective than somebody with—
SORKIN: Is this the Mobileye transaction? It’s been announced.
SOLOMON: It’s been announced. Okay, so that’s an example. So I mean, you know, the Porsche IPO came, so I think you’re going to see good companies that have a strategic reason for going public, you know, going public, but the valuation expectations and the discounts are going to be more significant until you start to see a good experience with that and, you know, that will move forward.
Historically, even in tough economic environments, the capital raising marketplace doesn’t even close for years at a time. But there’s definitely a reset going on in terms of, you know, what capital costs, you know, what the discounts are, but at the end of the day, companies need capital.
Companies need to move forward. They need to invest and they just have to look through the lens that’s appropriate for today’s market environment. I think that transition is going on and, and you’ll see that you know, evolve in the next—
SORKIN: How do you think about your own valuation, which arguably has underperformed relative to a lot of the other banks. I mean, the bigger you know, the big money center banks.
SOLOMON: I noticed year to date, year to date, you know, this year that our stock’s down less than the S&P and I think only other people we’ve been benchmarked against are down more than the S&P.
So, you know, what window do you want to look at? I, what I like, what I like the earnings power of the firm over time to be recognized more broadly than it is of course, but I think our job Andrew is we’re growing the firm, we’re growing the earnings.
I’m very proud of the fact since our investor day in 2020, we’ve grown the book value per share of Goldman Sachs by 40% since our investor day a little over two and a half years ago. If we continue to do that if we continue to grow our client franchise, focus on our franchise, grow our earnings, grow our book value, perform for our clients, we’ll do just fine.
SORKIN: But do you see the growth opportunity coming from the platform business? Is that where this, I mean when you—
SOLOMON: Our business, our our business is our our banking and markets business is strongest. It’s the strongest piece of the business but the thing I’d highlight there that that we feel very good about, look at our wallet shares over the last three years.
Some of the growth of that business came from the environment for sure. But our relative position in terms of our wallet shares, our wallet shares have really improved in those businesses over the last few years.
And I think that’s because of the way we’re serving clients and what we’re doing. So our wallet and our ranking with clients has gotten better and that’s helped the growth and the stability of the business.
QUICK: Stealing business from where?
SOLOMON: From other, from other, from other banks. Just take the banks, everybody reports, add up the wallet that was available, but what’s our share our shares are up 300 basis points. And so we’ve really improved our share, you know, in the in those businesses, we’re growing our asset management business. I’m sorry.
KERNEN: Well, historically where does Goldman trade to book? Because is this the right number 308 and it was at 306?
SOLOMON: We’re trading right around book.
KERNEN: You’re trading below book.
SOLOMON: Well, below book if the stock’s—
KERNEN: Today, it’s at 314. It’s up. So often do you have to buy Goldman. Buy Goldman at one times book.
SOLOMON: There have been, there have been a number of periods over the last over the last 15 years where you could buy Goldman Sachs at book. There have been a handful of times we can buy it below book but generally speaking, since the firm went public, it’s stayed above book.
I think if you look at if you look at the peer group, most of the peer group is trading around book or below book. But broadly speaking, I think the market still looks at these large financial institutions through a historical lens. I think they’re capitalized differently.
Their businesses are bigger, broader more diverse and their earnings power is is meaningful but it but at the moment, you know, certainly given the environment and the uncertainty I understand why people are cautious.
QUICK: Would you spend your own money to buy stock here?
SOLOMON: Well, I I own a lot of Goldman Sachs stock.
QUICK: But I mean at this valuation.
SOLOMON: Yeah, I I would, I’m not supposed to go on television and say, you know, this, that or the other. I think we’re running a very good company, a very good business. We’re doing really well with our clients and we’re very focused on our clients.
I think we’re making some interesting investments that give us some nice opportunities in the future to add to the firm. I think the asset and wealth opportunity and our ability to grow those platforms, you know, we’re very, very focused on our ability to grow management fees.
We put out a $10 billion target on management fees and a $2 billion alternatives target. We’re very focused on those. I think you noticed that we had to two and a quarter billion dollars in management fees, you know, in the quarter.
And so we’re, you know, we’re focused on diversifying and strengthening the firm serving our clients. If we keep growing our book value, growing our earnings, I think we’re going to do fine.
KERNEN: How many how many layoffs will we see?
SOLOMON: You know, I think it depends. I think when you look at when you look at businesses broadly, I think it depends on what the economic environment is.
KERNEN: Well for Goldman Sachs.
SOLOMON: I can’t predict, you know, obviously—
KERNEN: Will we see some in the next six months?
SOLOMON: I can’t predict we, I think you know, that we have a process that we do every year where we look at, you know, bottom performers a small single digit number that people that we don’t think are really working in their jobs.
We’d stopped that during Covid. And earlier this fall, we did an exercise in that context. But at the moment, we have no other plans. But I I can’t tell you what the future brings.
I think for all businesses, I think you have to look Joe, you know, Goldman Sachs’ headcount over the last two years has grown by 8,000 people. We’ve taken our headcount from 40,000 to 48,000. A lot of that is engineering talent.
We’re making a significant investment in the underlying infrastructure of the firm where I think, candidly, we’ve had some deficit and so we’re trying to catch up and invest. You know, wouldn’t be surprising if we got into a really tough environment. We’d certainly have to slow the pace of growth.
KERNEN: Would it be most of the people that want to stay at home. Are they out of here? I mean, it’s like they’re toast. I mean, it’s like you don’t want to come back, stay at home. You know, if you’re not gonna come in on Saturday, don’t even think about coming in on Sunday, right?
QUICK: This is Joe’s mentality by the way, this is what he’d like—
SOLOMON: So if I take a walk up from SOHO on Sunday morning, would I find you sitting here doing some work. Can I come knock on the window?
KERNEN: I might stop by here. There’s a Taco Bell over here.
SOLOMON: Would you let me in? We could have some coffee. If I come up on Sunday morning, we could have some coffee right here.
KERNEN: I’m here when the market’s open.
SORKIN: David Solomon, thank you for joining us this morning.
SOLOMON: Absolutely. Thank you guys. Really great to be with you. Appreciate the time.