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Morning Coffee: Everything you know about this Goldman Sachs banker is wrong. The new banking heroes are lawyers

As this profile of Marc Nachmann says, Goldman Sachs CEO David Solomon has “pinned his hopes on … a newly merged asset and wealth management division” run by Nachmann, and “his job security may depend on it”.  The article also correctly summarises the general view of the Street when it comes to Goldman’s ambitions to roughly triple divisional profits from their 2022 level, which could be summarised as “pretty sceptical”.

But sometimes, when everyone is lined up on the same side of an argument, it makes sense to consider the opposite point of view. Particularly if there’s reason to suppose that some of the cynicism is motivated by “negative halo effect” of the consumer finance ventures.

What if Nachmann’s task is achievable?  What if all the conventional wisdom about this business is wrong?  Let’s play devil’s advocate, taking the arguments one by one.

There’s a lot of management instability there”.  Perhaps.  It’s true that of the four executives highlighted on the org chart at last year’s investor day, three are gone.

But is that evidence that there’s infighting and turf wars?  Or that there was internal conflict, which is now over with a clear winner? Losing big names like Julian Salisbury was no doubt a disappointment, but Nachmann now has a clear run at managing the business without competing power bases.

It needs to be a stable source of earnings”. It is surprising how many people believe something that almost arithmetically can’t be true. Asset management is a business where the volatility of revenues is dependent on the market, only about a third of the costs are variable, and profits are a small difference of two big numbers.

But although the industry itself is the opposite of stable, it can be a source of stability for a diversified group.  If managed properly (avoiding massive conduct fines and people like Lex Greensill), it almost never makes an actual loss.  And the profits it makes do not consume regulatory capital, meaning that a good wealth management franchise can support the rest of the bank.

Looked at in this way, the division under Marc Nachmann is likely to be a really big source of stability.  One of his main strategic changes is to run down a large portfolio of proprietary equity investments to concentrate on third-party accounts. Although these investments have generally been very profitable, this means that this business will have a similar role to the “legacy capital realisation” divisions familiar to European bankers.  It will throw off regulatory capital faster than its earnings, giving David Solomon a structural cash flow to either reinvest in growth or pay out to keep shareholders happy.

The growth targets are unrealistic”.  The same operational leverage which makes the earnings volatile works on the upside as well as the downside.  Although Goldman is targeting a margin of 20% for the division, the “marginal margin” (the proportion of revenue growth which flows through to the bottom line) is always very high indeed for a wealth management business.  A quick look at hedge fund or private equity firms shows that there’s hardly any percentage growth target that can be ruled out.

It’s not as good as Morgan Stanley”.  This is backward-looking.  Goldman’s wealth management business is not targeting the same segment.  It’s aimed at accounts of at least $20m, compared to Morgan Stanley’s target size of $5-10m. 

This matters, because American wealth management clients are old and getting older.  A portfolio of $25m is still an economically viable proposition for a high-touch private banking service when it’s been split four ways and paid estate taxes.  A portfolio of $8m is much more marginal when it’s cascaded down to the next generation.

This isn’t to say that Nachmann is on to a sure thing – wealth management in a bear market is not an easy job.  But his hand might contain more playable cards than people think.  Historically, some of the best wealth managers have been M&A coverage bankers who have moved over to look after the finances of their CEO clients.  In the current environment, if Marc Nachmann starts taking an interest, Goldman bankers might be well advised to return the call.

Elsewhere, in a world in which most people’s bonus expectations have dwindled away to very little, who is still crushing it and potentially generating billions for their employers? Very few, but among them are the brave men and women who make their career out of suing the government and lobbying politicians over regulations that seem unfair or excessive.  And uniquely in the banking industry, of course they have no fear of ending up in court with the regulators, because that’s their job.

Meanwhile...

The Goldman Sachs Managing Director class of ’23 is 5% smaller than last year, but still larger than years like 2019.  It has a record proportion of women (31%) and has much more representation for revenue generating front office producers rather than platform engineers compared to the recent past (WSJ)

A significant move in Hong Kong – after leaving CLSA to join SMBC Nikko in 2020 as head of APAC-ex-Japan debt capital markets, Leo Tong has now moved on, with four other DCM bankers joining him. (Bloomberg)

One day, most likely, someone will be Revolut CEO when the UK banking licence is finally granted.  Congratulations for Francesca Carlesi, the latest person to start waiting.  (Sifted)

There’s another Spanish investment bank hiring in London – as well as Santander, midmarket superboutique Alantra has grown its front office headcount by 20% since moving its headquarters to the UK. (Financial News)

Almost certainly coming to a summer intern program next year, a TikTok influencer who is using live transcription software and ChatGPT to ace technical video interviews (Twitter)

But anyone who gets a career as a junior banker this way will be found out in the end; researchers found that ChatGPT can pass Level 1 and 2 CFA exams but not Level 3.  It does surprisingly well on the ethics modules, but tends to fall down on accurate calculation and logical reasoning. (Bloomberg)

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AUTHORDaniel Davies Insider Comment

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