WHEN: Today, Monday, May 2, 2022
WHERE: CNBC’s “Squawk on the Street”
Following is the unofficial transcript of a CNBC interview with Goldman Sachs Chairman & CEO David Solomon on CNBC’s “Squawk on the Street” (M-F, 9AM-11AM ET) today, Monday, May 2nd. Following is a link to video on CNBC.com:
All references must be sourced to CNBC.
DAVID FABER: We continue our coverage from the Milken Institute Global Conference here in Los Angeles and joining me now is David Solomon. He is the chairman and CEO of that firm called Goldman Sachs and I’m glad we could get back on schedule ourselves. It’s a May conference again, we did an interview here annually for a while. So, thank you for being here David.
DAVID SOLOMON: I’m delighted to be with you. It’s great to be with you in person and glad to be back here. And I put on a tie for you because I knew you’re always so dapper and so I put on a tie for you—
FABER: I appreciate you doing that.
SOLOMON: And happy to be here with you.
FABER: I expect that from my guests so thank you David.
SOLOMON: Absolutely.
FABER: You know actually, it’s the first chance to talk to you since since the earnings I believe. And you said something interesting in your comments. You talked about an accelerated trend towards deglobalization. In recent decades, you said we’ve grown used to low inflation, low rates, free flow of people and goods. I believe we’re entering a period that that won’t be the case and the consequences for financial markets will be meaningful. That caught my eye David, give me a more of a take on what you meant when you said that.
SOLOMON: Well, we’ve benefited enormously from global capital flows over a long period of time. And when I think about the last bout, the last significant bout that we had with inflation back in the 1970s, there’s no question the Fed and Paul Volcker had a big impact in unwinding that trend. But one of the big macro trends that had a big impact was the fall of the wall and really ushering in a period of decades of globalization that really brought prices down, all over the world. And there’s a variety of things going on in the macro that seem to be reversing those trends. And, you know, my statement when I hear you read it back seems a little bit more certain than I am. I’m not I’m not certain that this trend will continue, you know, over the next couple of decades but at the moment, we’re certainly seeing more nationalism. We’re certainly seeing because of the pandemic a sense to think about our energy independence, our commodity independence. We’re thinking about food supply chains, we’re thinking about those things and all of that has an impact to some degree on prices. And so, we’re in the early stages of seeing how people adjust behavior, seeing how people change supply chains and all of that will have an impact on us.
FABER: Well, what about the global flow of capital? I mean, Goldman Sachs has benefited enormously over the last 30 years from that as well. Does that change at all as a result of some of the things—
SOLOMON: Well, it shifts, it shifts a little in a world where there’s more geopolitical uncertainty, the risk premiums that people demand to move capital around the world certainly change and they adjust a little bit. And so, you know, I think those changes are subtle, whether they’re long dated and they’re profound is still yet to be seen. And part of it will depend on the journey from here. You know, how deeply rooted is inflation? What goes on geopolitically, how does the conflict in Ukraine continue to unfold? What happens in the bilateral relationship between the US and China? I’d say the big thing, David, is there’s just much more macro uncertainty and that macro uncertainty certainly can affect capital flows.
FABER: Yeah, well as can a Fed that has aggressively raising rates and reducing its balance sheet. It’s not something we’ve seen for a very long time. Of course we’ve never seen a Fed with a $9 trillion balance sheet to begin with. Is it worrisome to you? You know, and if there is a concern, what would it be?
SOLOMON: Well, I wouldn’t, I wouldn’t say that it’s worrisome. I think the Fed is appropriately focused on the fact that we’ve got real inflation in the economy and their monetary policy actions are part of the toolkit to try to tame that and try to find a path to a soft landing and you know that that path is unclear. I think there’s no question the perception of how aggressive the Fed will be in 2022 has changed over the last few months and certainly prospective at the beginning of January is difficult from the perspective today. But rates are definitely going higher. When rates go higher, it tends to have an effect on the dollar and on asset prices. And so we’ll have to watch that very closely. But the the path of all that and whether or not it can be navigated in a way where we kind of land softly and we don’t have a serious recession is hard to predict.
FABER: It is. Want to take any guesses?
SOLOMON: No.
FABER: You don’t.
SOLOMON: I don’t want to take any guesses.
FABER: I mean we’re all talking, can they really do it? Can they engineer the soft landing?
SOLOMON: Our, our, our research, on our research team, he thinks the chance of a recession is approximately 30%, you know, over the course of the next 24 months. But that’s you know, that’s an economic forecast looking at a bunch of inputs and tools. I think they think that the when you look at kind of the demand side of the equation, it will rebalance a little bit more efficiently over the course of the next 12 to 24 months. Personally, I worry a little bit about labor. Labor is, you know, very, very tight and a lot of labor imbalances and certainly that’s something we’re gonna have to watch very closely.
FABER: Yeah. When you talk about labor I mean even your own, right, in your in your annual report your letter to shareholders, “Key to our success has been,” well actually, you raised compensation and benefits up 33%. Now the comp ratio actually was fine and it even went down a bit.
SOLOMON: The comp ratio went down—
FABER: But you are having to pay people a lot more money.
SOLOMON: There’s there’s no question. There’s no question that across all organizations in any business right now, there’s inflation and wages and the market is extremely competitive for talent. We’ve always been a pay for performance culture and so also our people benefited from the fact that last year, we really performed. We grew our book value by over 20% last year, and had an ROE north of 20%. That’s not something and I said this in our January earnings call that’s likely to be repeated this year. But there’s no question—
FABER: But can you put a lid on, I mean, in other words this year may not be as quite as strong as last year, will comp no longer go up at that rate, or are you still going to have to compete in a way that perhaps you hadn’t in the past for talent so that comp ratio does start to go up.
SOLOMON: Well, we’re always going to have to compete for talent. I’d say with the highly paid people, we’ve got a lot of comp flexibility based on performance. But we have 50,000 people around the world, most of those people do not make the high wages that are always written about and there’s there’s pressure there. But we’re always gonna pay our people competitively and we’ll do what’s right for the long term for our people and for the firm and that’s what we need to do to serve our clients and so we’ll always make the right long term decision.
FABER: You know, it’s funny that you mentioned clients because that was something else I saw in in your annual letter, which is you said, “Key to our success has been a renewed focus on clients.” Kind of implying in a way that you hadn’t been focused on them?
SOLOMON: Well, we we’ve always been focused on clients, but I think one of the things that this leadership team has tried to do over the last four years, is to really think about how our clients experience their interactions with the firm. And if you think about the business of Wall Street, it grew up as a product siloed business, people sell products. And if you think about the big institutions that we deal with, the big corporations, most of them touch Goldman Sachs in multiple ways and we’ve really tried to think about a one Goldman Sachs approach to really make sure we’re thinking about all of what they need, not individual touch points. And that’s something we’ve worked hard at trying to create the right incentives, trying to really think about their experience and feedback from clients has been fantastic and so that’s helped our market shares. That’s helped our clients’ desire to work with us and that’s, that’s a refocus on their experience, which I think has been really helpful. And we’ve gotten very good feedback on it.
FABER: You’ve been CEO four years already?
SOLOMON: It’ll be four years in September.
FABER: Four years in September.
SOLOMON: Time flies when you’re having fun.
FABER: It does. Well you call them clients, your predecessors sometimes called them counterparties. We won’t get into that. David, specific to those people that we talked about and their wages have gone up, are they coming in the building? You know, you waged this kind of public campaign it would seem to have people show up five days a week. It feels like you lost. What are you seeing right now in terms of attendance?
SOLOMON: Well, our, our attendance across the United States is, is pretty good. It’s between 50% and 60% I’d say. Pre-COVID, it was probably 80%. When you look in Europe and in London, it’s actually higher. When you look in Asia, it’s 100% when offices are open, so you know, think about our business as a big global business and it’s different in different parts of the world. But we’re focused on the experience that our people have, and we’re focused on the fact that our people want to come together. Our workforce is very young. So 50% of our workforce is in its 20s and I recently read a McKinsey report that talked about the fact that Gen Z workers, that 68% of Gen Z workers were unhappy at work and one of the things they pointed to was a lack of mentorship, lack of relationships, and the fact that the separation or working remotely wasn’t giving them that same experience.
FABER: So why aren’t they coming back to the office five days a week?
SOLOMON: Well, I think what’s what’s important and look, it was never as binary as people portray that we, that we’ve, we’ve talked about it. We we want people to generally come together. We want people to work in teams, we’re a collaborative culture. And I think we’re at a moment in time and it’s gonna take some time, you know, behavior shifts take time generally. And I think over the course of the next couple of years, our organization will generally come together. There will be certain flexibility probably for certain roles and certain things, but there always has been. There was before COVID. We just didn’t talk about all of that. We did what was right for our people. We did what we needed to do to make our office environment super competitive, and we’re continuing to do that.
FABER: But have you changed your own view in a sense because your employees forced you there?
SOLOMON: I, I’ve always had a view that’s been rooted in flexibility and taking care of our employees. It’s been portrayed some time as much sometimes as much more dogmatic than it is.
FABER: Okay.
SOLOMON: And I, you know, I don’t need to, you know, debate that but we’ve always tried to give our employees the latitude to work very, very hard to be with clients, to take care of their personal lives and their family and we’re always going to continue to do that. And you can’t—
FABER: Well, the guys of our generation, though, you expect people in the office. It’s the only way you learn. It’s the only way you get cultural attachment.
SOLOMON: Generally speaking, we still believe for an organization like ours where 50% of the people in their 20s that generally speaking, we’re going to come together and we’re going to work together and by the way, that’s what’s going on. That is what’s going on at Goldman Sachs today. And so we’re going to keep that that and, you know, I read a lot about how all this affects people and I think you’ve got to look at it as more than just this moment. You know, this McKinsey study that I referenced, you know, it’s just interesting the effects of how people feel about all this will take some time for us all to understand, and people will make decisions based on that over some reasonable period of time.
FABER: Yeah. Well, speaking of your employees now we’re not in New York, we’re in Los Angeles, but we are both New York based. But I wonder is Goldman Sachs more and more a national company in the sense of where your employees work? Miami seems to be growing. Dallas, you seem to be growing. Is New York no longer a focus for you in terms of growing?
SOLOMON: New York’s a big focus and, you know, we have 10,000 people in New York. I think what’s changed as our organization has gotten much larger and much more dispersed around the world is an openness to have lots of centers of excellence, lots of hubs, lots of places where people can work and want to work and the big reason for that is attracting talent. And so if you think about when I joined the firm David in 1999, 94% or 95% of our workforce in the United States was in New York. Today, we have 26,000 employees in the United States. 50,000 employees around the world, but in the United States, 10,000 of the 26,000 are in New York and we have 3,500 in Salt Lake, we have 3,300 on the way to five or 6,000 in Dallas. Again—
FABER: You increased. You’re doubling the size in Dallas.
SOLOMON: But this is, part of this is to attract people. Part of this is to have a much broader footprint that allows us to be closer to clients. We’re growing in a place like Toronto because there’s great tech talent there that grows up in the educational ecosystem in that part of the world that wants to stay in Canada, but it’s super attractive engineering talent, and so we’re doing what we need to do to make sure we’re close to our clients, and we’re able to attract talent and Florida everybody talks about Florida but the reality of it is we have 200 people in Florida. My guess is if we were sitting here three years at the Milken conference, I’d tell you we have five or 600 people in Florida, but it’s—
FABER: It’s not right.
SOLOMON: It’s not, it’s not the same but there are people, people want to live down there and we have critical mass down there. And you know what, we can accommodate that and that’s, when we think about flexibility in terms of being really attractive to talent, it’s more having hubs and centers of excellence with a culture of the firm and the ability to mentor and to apprenticeship can really thrive and to give people lots of choices, and therefore be a very, very attractive work environment. And we’re doing that all over the world. And we’re doing that in the UK, we now have a development up in Birmingham where we’re finding very, very good talent. And so you’ve always got to be thinking, you know, over the next 10 years in the context of this stuff.
FABER: Alright finally, I want to come back to right now and I want to come back to a conversation you and I typically would have here. Let’s end on the capital markets. Let’s end on I mean, you know, IPOs are not happening much anymore. This kind of volatility doesn’t usually bode particularly well for M&A. These are still key franchises of yours. I know alternative assets are a big part of what you’re doing now. But IPOs, M&A, what are your expectations for the let’s call it the second half of the year given what we’re seeing, David?
SOLOMON: Well, anymore is the kind of big word so when you say IPOs aren’t happening anymore.
FABER: Yeah, you’re right. I take that back.
SOLOMON: There aren’t a lot of IPOs right now.
FABER: It’s not a great time to become public right now.
SOLOMON: It’s not a great time—
FABER: For a growth company in particular.
SOLOMON: Particularly if you’re a growth company right now. However, you and I have been students of the capital markets for a long time. And you know, you know with everything the world’s thrown at us, it’s been very rare that we’ve gone more than a few quarters with the IPO market, you know, really, you know, very, very tight and so, you know, this is this is a moment in time. There certainly are businesses that can and will go public. I think the wave of the value expectation for young growth companies has to be reset, and that takes a period of time. And so, you know, I think equity capital markets activity will be more constrained for a period as we navigate this. We’re still reaping the benefit of a lot of M&A activity, you know, last year. At the same point, certainly in the first quarter, and this wouldn’t be surprising because when things are volatile confidence, you know, decreases and that affects M&A activity. But we’re still seeing a lot of engagement as people are trying to think about how to position themselves strategically in a world with inflation above trend and higher rates. And we’re also starting to see more take private conversations. And so, you know, the ecosystem is pretty powerful. I don’t think what’s going on now stops all that, but we’re probably not going to see the robust levels of activity that we saw last year. By the way, I said that in January before, you know, this, you know, this roadmap was laid out.
FABER: Yeah and meanwhile Microsoft bought Activision and then this guy Musk came along and decided to take Twitter private for 44 billion. So who knows I guess.
SOLOMON: There’s certainly, this, lots of CEOs are really thinking about what this all means for their competitive position and, you know, that leads to dialogue and dialogue ultimately leads to activity and a higher interest rate environment, people are gonna have to think about their capital structures differently. And so there’s no question that will create opportunities for advice and activity. So I think when the volatility starts, the activity constrains, but then people deal with the new reality and there’s certainly, you know, plenty to do and our clients seem to be very active and looking for advice.
FABER: Well, you guys have had some of your best years during periods like that haven’t you?
SOLOMON: Absolutely.
FABER: David, always a pleasure. Thank you.
SOLOMON: Always great to see you, David. Thank you for having me. Look forward to seeing you again soon.
FABER: As do I.
SOLOMON: Thank you.
FABER: David Solomon, Chairman and CEO of Goldman. Back to you Carl.
