Morning Coffee: Goldman Sachs tried too hard to be kind to its employees. The unfortunate skill that creates great team players
Banks have long been known for overreacting when it comes to hiring and to firing. Their over exuberance on the way up is matched only by their over exuberance on the way down, and once one bank begins dramatically flexing its headcount, the rest will usually follow.
Goldman Sachs has spent the past five years in a giddy swoon of hiring. In the five years from the end of 2017 to the end of 2022, headcount at the firm went from 33,600 to 48,500, an increase of 44%. That came to an end with the 3,200 job cuts Goldman made last month, and it now seems that the firm has some regrets: it should have cut sooner.
“As the environment was growing more complicated in Q2 of last year, every bone in my body believed we should be much more aggressive in slowing hiring and reducing headcount,” Goldman Sachs CEO David Solomon informed the firm's 4,000 partners at their meeting in Miami last week according to the Financial Times.
The bank isn't commenting, but Solomon seems to have been remarkably successful at suppressing his presentiment of doom: between the end of Q1 2022 and December, Goldman added another 4,800 people.
Around 1,000 of those employees came from Greensky, the digital lending firm that Goldman acquired at the end of March. Others appear to have been the product of organic growth. As the presentiment shook his bones in April last year, Solomon said he was confident that investment banking fees would come back soon because it didn't "take a year for people's mindset around the reality of markets to reset. It's more something that happens real time over months or quarters." In July, CFO Dennis Coleman said the firm had decided to "slow hiring velocity" and Solomon said that while the business environment might get worse, it might also get better. But in any case, Solomon said the decline in investment banking revenues since 2021 wasn't the issue - 2021 was an outlier, and it was the average of the previous seven years that was relevant, and he averred that some sort of normalization to that baseline was surely coming soon.
Solomon's slowness to cut costs might therefore be seen as the product of optimism. But it could also be down to a lingering faithfulness to the firm's existing strategy and its existing staff. During the same July call, Solomon said the firm was there for the "journey" with the loss-making retail unit. And in October, Coleman declared that there was a lot of talent both inside of Goldman Sachs, that needed to be kept, and outside of Goldman Sachs that could be added to strengthen the team. Having already added thousands of staff, it might therefore be considered that Goldman fell foul of the sunk cost fallacy - or simply that it wanted to keep its existing people happy.
Now that Solomon has decided to abandon this stance, the question is how quickly and to what extent other banks will follow. The question is also whether Goldman will cut again: even after the 3,200 cuts already made, the firm still has more people than it did when Solomon's bones told him to reduce headcount last year.
Separately, banks love a team player and becoming one is helpful to career success. But while being a team player might seem to be about listening and kindness, it's got far more to do with an astute sense of hierarchy and a willingness to submit to the dominant members of a group.
The Wall Street Journal reports that team success is all about “status intelligence,” or the extent to which its members can accurately, "read the status dynamics of a group—how much respect and influence each team member has."
When the big dogs are talking, even if what they are saying isn't astute or relevant, it's necessary to listen quietly. Only some people have permission to interrupt successfully. Others are ignored, irrespective of their content of their comments. Smooth teams and team players play the game.
Banks say they want to move away from fixed income currencies and commodities trading, but in 2022, FICC generated around a fifth of group revenues of the largest five US investment banks. (Financial Times)
Your reminder that Barclays results this week will be haunted by the £729m loss it made by selling products that weren't authorized. (The Times)
Another bank shook up its UK investment banking team. Morgan Stanley appointed Ben Grindley and Anthony Zammit as co-heads UK and Ireland investment banking. (Financial News)
Rothschild needs to be able to give its top investment bank partners equity to retain their loyalty to the firm. This is difficult in a public company, because other shareholders do not want to be diluted. (The Times)
Psychological safety at work "isn’t a panacea for people to be able to say what they are thinking without consequences...It’s about understanding that we have a responsibility to listen to one another, to identify truths and speak them well but speak them kindly.” (Financial Times)
Deutsche Bank had flaws in its internal controls that were deliberately exploited by staff on one of its trading desks. FX swaps were pitched by Deutsche as a cheaper way to hedge currency risk. Small companies were told the products were “zero premium” with no initial cost and could even make them money. (Financial Times)
Inside the CS First Boston deal: “The idea is to create a big boutique, two to three times the size of the next largest, but with the firepower of the monster investment banks. To me, this model is the future of banking.” (Financial Times)
Societe Generale’s trading value-at-risk averaged €24 million ($26 million) over the last quarter of 2022, a one-third increase compared with Q3. BNP Paribas’ VAR fell 3% quarter on quarter. (Risk)
Welcome to the 60-year career. (Wall Street Journal)
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