Is Goldman Sachs taking a page out of WeWork’s crisis playbook?
As the investment bank works to try and repair its reputation as a cloistered and, ultimately, corrupt institution that sometimes uses its penchant for secrecy to commit massive abuses like it did in the 1MDB scandal, Goldman has revealed planned changes to its financial disclosures that analysts said will offering more transparency into how the bank makes money, according to the WSJ.
The filing, which was published late Monday, comes ahead of the bank’s first investor day later this month, Goldman explained the changes to how it breaks down the performance of its various businesses. During the late Jan. investor day, Goldman execs are expected to outline new profit metrics and goals the bank expects to hit.
Investors should remember that WeWork authorized several changes to its corporate governance intended to allow more transparency and dilute the control of former CEO Adam Neumann, both the changes were derided as too little, too late, and the IPO was scrapped.
Beginning with Q4, Goldman plans to report performance broken down into four main businesses: Services for the bank’s corporate clients, trading, money management and services for wealthy – and now, even non-wealthy – individuals.
A quick look at Goldman’s 8-k filing reveals a chart that breaks down these changes, offering a preview of how they will appear in the bank’s Q4 earnings report.
Another chart offers some context by detailing some of the biggest moves of businesses from Goldman’s old to its new structure.
And here’s a bullet-point breakdown, included in the filing, that offers a little more clarity on the changes:
- Investing & Lending results are now included across the four segments as described below.
- Investment Banking additionally includes the results from lending to corporate clients, including middle-market lending, relationship lending and acquisition financing, previously reported in Investing & Lending. These results are included within Corporate lending.
- Institutional Client Services has been renamed Global Markets and additionally includes the results from providing warehouse lending and structured financing to institutional clients, previously reported in Investing & Lending, and the results from transactions in derivatives related to client advisory and underwriting assignments, previously reported in Investment Banking.
- Investment Management has been renamed Asset Management and additionally includes the results from investments in equity securities and lending activities related to the firm’s asset management businesses, including investments in debt securities and loans backed by real estate, both previously reported in Investing & Lending.
- Consumer & Wealth Management is a new segment that includes management and other fees, incentive fees and results from deposit-taking activities related to the firm’s wealth management business, all previously reported in Investment Management. It also includes the results from providing loans through the firm’s private bank, providing unsecured loans and accepting deposits through the firm’s digital platform, Marcus: by Goldman Sachs, and providing credit cards, all previously reported in Investing & Lending.
As investors try to suss out the implications of these changes, it’s worth remembering that last time Goldman did something like this, it was operating from a “position of weakness,” according to WSJ. Back in 2011, the bank started disclosing its profits from its proprietary investing, a practice that continues to this day in a way that’s seemingly designed to skirt the Dodd-Frank ban on prop trading.
Indeed, an early VC investment made by Goldman in Uber netted the firm hundreds of millions in profits during the ride-hailing company’s IPO last year. Some might say Goldman was one of the few Wall Street banks for whom Uber’s floundering IPO was still a smash-hit success.
Circling back to the filing, Goldman is setting aside $302 million for potential consumer credit losses in the first nine months of 2019, compared with $338 million for 2018 and $123 million in 2017.
Infamous banking analyst Mike Mayo (now with Wells Fargo) praised the changes in an interview with Bloomberg.
“The presentation is more consistent with the way the business is run and the way it is presented by peers,” Mike Mayo, an analyst at Wells Fargo & Co., said in a note. “While we view management as focused more on long-term value, this attitude shows that management is aware of an underperforming stock price.”
The news had a positive impact on Goldman’s shares, sending them up 1% on a day where US indexes have been in the red all morning.
Last year, Goldman’s shares climbed 38%, managing to shrug off worries about the bank’s role in the 1MDB scandal, as well as a consumer-lending business that hasn’t lived up to the bank’s (and Wall Street analysts’) expectations. Despite this, the bank still lags its peers – including archrival Morgan Stanley – on several key valuation metrics.
The changes are part of CEO David Solomon’s efforts to put a “shot of transparency” into the bank for investors. The move will “peel back the curtain on Goldman’s lending and proprietary bets and reshape its quarterly reports to investors to look more like those of its peers,” like JPM and BofA.
Solomon’s motives are simple and obvious: despite shares rallying nearly 40% last year, Solomon reportedly believes Goldman shares could be trading much higher than where they are right now. In a private gathering, Solomon reportedly told other executives that Goldman shares could climb above $400 (it’s trading at $235 on Tuesday).
With that in mind, expect the bank to pull out every gimmick it can to try and boost investors’ confidence that Solomon is reforming the bank after the post-crisis years where the bank trawled the emerging world for business, cowboy-style, under the leadership of former CEO Lloyd Blankfein.
Read Goldman’s new 8-K below: