WHEN: Today, Monday, June 12, 2023
WHERE: CNBC’s “Squawk on the Street”
Following is the unofficial transcript of a CNBC exclusive interview with Goldman Sachs Chairman & CEO David Solomon on CNBC’s “Squawk on the Street” (M-F, 9AM-12PM ET) today, Monday, June 12 from the 2023 Forbes Iconoclast Summit in NY. Following is a link to video on CNBC.com:
All references must be sourced to CNBC.
SARA EISEN: Good morning. Yes, I’m here with David Solomon, the CEO of course of Goldman Sachs. David, thanks for taking the time.
DAVID SOLOMON: Thanks, Sara. It’s great to be here with you.
EISEN: So it’s a huge macro week. I think we have to start there. We’re gonna get inflation numbers. We’re gonna get a Fed decision, we’re gonna have an ECB decision, retail sales. Are you surprised at how resilient the U.S. economy has been holding up given the inflation shock and the rates shock and the bank failures and everything else?
SOLOMON: The U.S. economy has been incredibly resilient and I would say that I have been surprised, you know, over the course of last year. I certainly predicted given the economic tightening we’ve seen, you know, a bumpier ride than we’ve had so far. You know, I still think we’re at an uncertain moment and, you know, I just said at the conference here, while our economists again reduced their view on the chance of a recession in the U.S., I just think it’s a period to be a little bit cautious. You know, I’ve got enormous respect for you Jan Hatzius.
EISEN: You’ve always sounded more bearish than he is.
SOLOMON: You know, but he’s been more right, you know, at this point. And so, I think we look at it, you know, I think we could muddle through here with a much softer landing than we would have expected. But I think if you’re running a big financial institution, or you’re running a business at the moment, we still could have an environment we have slow, sluggish growth and inflation a little bit more sticky. And so I think you’ve got to be a little bit cautious. That might not be a recession, but it certainly would feel like a recession if we had an environment with 0 to 1% growth and 3.5 to 4% inflation.
EISEN: Last month, you were at our CNBC CEO Council and we were on a panel together and you were talking about how you do expect inflation to remain stickier and the Fed to keep hiking rates. Do you still feel like they have a lot more work to do?
SOLOMON: Well, I’m not referring necessarily to this week, but I do think inflation is a little bit stickier. And you know, I do think that in the distribution of outcomes, there’s a reasonable chance that rates do go higher. I’m not saying they’re definitely going to go there, Sara, but I think you’ve got to be prepared for that. And you know, what we’ve learned we always think about things through the lens of risk management and being prepared. You know, I’m not a good predictor of where interest rates will go. But I do think given what’s going on, the way we’ve tightened economic conditions, we still have stubborn inflation, there’s really a chance that rates go higher and if they do, you know, that probably is going to make the economic, the economic environment a little bit more challenging.
EISEN: So the recession comes when?
SOLOMON: You know, if we had a recession, you know, I don’t know the end of this year, the first half of next year, but we might not I mean, to the point to Jan’s view, you know, there’s a reasonable chance the consumer has been more resilient. We still have relatively full employment, hard to have a recession with three and a half percent unemployment. And so, we’re watching the data like everybody else, and we’ll just have to see but so far, you know, things have been navigated reasonably well after what was obviously a very disruptive period. You know, we had significant disruption from the pandemic, significant disruption in terms of the magnitude of fiscal stimulus, and we’re now, you know, trying to rebalance that. Sure, there have been some speed bumps, but you know, I think I think so far, the economy has been more resilient than we expected.
EISEN: It got close to the debt ceiling, now we’re worried about all the issuance and the liquidity concerns there on top of QT. How does how do all these macro headwinds primarily the volatility and rates impact your business, investment banking and trading in particular?
SOLOMON: Well, there’s no there’s no question that there is, you know, I think our clients are a little bit more risk off right now and we’ve seen that over the course the last few months. Certainly capital markets activity has been anemic for the last 12 months or so. But that’s not unusual when you change the environment and evaluation so quickly. We really went after it a very, very robust period in 2020 and 2021. We reset valuations in 2022. We reset capital costs, and that obviously slowed down capital markets activity significantly. I always say it takes four to six quarters to reset. We’re kind of five quarters in.
EISEN: Are we seeing green shoots?
SOLOMON: We’re starting to see some green shoots, and I would expect capital markets activity to pick up as we head into 2024. Now at the end of the day, people need capital. They can defer some of those activities, but at the end of the day, they can’t postpone them indefinitely.
EISEN: 2024, why? What what changes?
SOLOMON: You get to a point where people understand and accept this is the market that we’re operating in. They need to drive their plans forward and they stop wishing for the environment that they were in and they start looking, you know, looking at the reality the environment we’re in now.
EISEN: What green shoots do you see?
SOLOMON: There’s just been a little bit more equity issuance, a little bit, little bit more leveraged finance activity, we’re starting to see just in terms of our shadow activity, a little bit of an increase in that shadow activity.
EISEN: So does that mean, do you foresee further headcount reductions in the business?
SOLOMON: Well, when you, when you when you look at our business, our business has, you know, a couple of headwinds. At the moment, we talked about capital markets headwinds, we’re always looking to right size the business for the opportunity and over the course of the year, you know, as you appropriately point out, we’ve been narrowing our headcount just a little bit to rebalance. You know, I’ve talked to you before Sara about the fact that we run this human capital business where we always do report performance reviews every year and during the pandemic, we stopped those performance reviews. We did not stop hiring 3,000 young people every year. And so we grew our headcount pretty significantly during the period of 2019, 2020, 2021 really to meet client activity demand, probably went a little bit too far. We’ve started those performance reviews again. We did some headcount work in January, doing a little bit more now. We’ll look forward and we’ll see what the environment is, but we’re always going to right size the business, you know, to the environment that we see.
EISEN: So it sounds like yeah, that’s that’s still a headwind and could come. I wanted to ask also David about commercial real estate. There was an article this weekend in the FT pointing out higher rate of delinquencies in the Goldman loan portfolio there. They tied it to Twitter not paying its rent in San Francisco building, but I’m curious how problematic you see this area.
SOLOMON: Well I think there are a couple of things to think about here. You know, first, real estate is the single largest asset class in the world. And when you look at what’s happened over the course of the last 12 months where we’ve tightened interest rates by 500 basis points, there’s no question that the real estate market in particular commercial real estate has come under pressure. You know, at Goldman Sachs, we have a relatively small lending portfolio compared to many others. But we do and do have a significant amount of significant but we do have a reasonable amount of equity investments in real estate compared to a number of our banking peers and the reason for that and I know you’re familiar with this is after Dodd-Frank, we grew our alternatives business on balance sheet. And so, you know, real estate affects us and we have headwinds from this in three areas. You know, first, we do have some lending and you’ll see some impairments in the lending that would roll through our wholesale provisioning, and you’ll see some of that this quarter, last quarter for the real estate that we consolidate, we showed close to $400 million of impairments, and we’re going to see more impairments again this quarter. And then lastly, as I said, we have some equity investments in real estate as a part of our equity portfolio that’s on balance sheet and we think that we and others are marking down those investments given the environment, you know, this quarter and the coming quarters, and so some of that will play through in the market. But all of this in the context of the overall size of Goldman Sachs, you know, is manageable, but it’s definitely a headwind at the moment.
EISEN: What about for the overall economy? Wondering how big of a threat it is.
SOLOMON: Well, what it does, it does exactly what you would expect it to do, it constrains lending. And so, you know, given that people have, you know, these assets on lending balance sheets, and in fact, particularly when you look at the regional and midsize banking system, about 65% of commercial lending, you know, falls into the regional mid-size banking system. And so, in this environment, that will constrain more additional lending, that makes capital more attractive and it crowds out some economic activity, and that’s just something that we’re gonna have to work through. And they’ll probably be some bumps and some pain along the way for a number of participants.
EISEN: You’re still getting a lot of questions about the consumer business obviously and where you are in this process of right sizing it and taking it where you want to go. Greensky sale, people want to know where you are in that process and how fast you’re moving.
SOLOMON: Yeah, well, I think we’ve been pretty clear you know, Sara, that we narrowed our direct-to-consumer ambitions very materially. We’re running our deposit platform, which continues to be a very significant success, and we also launched through our Apple partnership, an additional deposit platform which has gone very well so far. We have our two credit card partnerships that we’re continuing to work on running them better and improving them and we said to the world that we’re looking at the potential sale of Greensky, I don’t have an update on that at this point. But that’s really where our focus has been. We also announced that we were removing the rest of the Marcus loans that we had our balance sheet and we’ve done that successfully. So we’ve narrowed to the focus. We’re making progress, you know, as I’ve amplified, you know every time I’ve asked it’s a small portion of the firm, it’s a small drag—
EISEN: Do you have a lot of investor questions or more media?
SOLOMON: It’s media. We don’t get a lot of investor questions. The questions generally come from the media, but it’s appropriate and, you know, people want to understand, you know, everything we’re doing across our business. We’ll highlight our core banking and markets business. It’s certainly been sluggish. John talked about that a little bit because there’s been less capital markets activity, as we’ve just been talking about, but that business on a relative basis continues to perform really well and that is, you know, the lead engine of the firm. Great feedback from our clients, continuing strength in our market shares there and we’re super excited about our asset and wealth management story, what we laid out in investor day, our ability to grow that asset and wealth management business and as we continue to reduce our balance sheet, and I just talked about our commercial real estate on balance sheet, that was part of our alternative strategy. Over the last few years, we’ve been changing that strategy, reducing that legacy balance sheet, and now focused on a client fund model and as we get behind that, that obviously improves the returns in that business materially.
EISEN: Yeah I was going to ask how you, what the return is on it, how you get the path to return on equity. How do you get to the 14 to 16% improvement?
SOLOMON: We have, we have a big global banking and markets business, you know that I think, you know, in the first quarter performed very well. You can go look at the returns on that but mid-teens. I think that business is mid-teens through the cycle. That doesn’t mean you won’t have a quarter where the returns are materially lower, but through the cycle, it’s a mid-teens business. It’s a significant part of the firm. As we continue to reduce this legacy balance sheet, which right now in this environment is a big headwind to our returns, you start to get meaningfully improved returns and our asset and wealth management business and Marc Nachmann at investor day, you know, laid this out pretty clearly. It’s going to take a period of time, it’s going to take a couple of years to work through that. But we’re relatively confident that we we bring to consumer platforms to profitability, that reduces the drag there. So we think we have a clear plan. We think we’re executing on it. The environment is not a perfect environment and so, we have some headwinds. You know, as I just mentioned around that, but when I look forward over the next two to three years, I feel really good about the way we’re executing, and in particular, the way we’re executing for our clients.
EISEN: There’s also the SVB fallout, the bank failures. What sort of regulatory action do you expect as a result of that, and how would it impact at Goldman?
SOLOMON: Well, there’s no question that that there are regulatory headwinds and that the the the overall regulatory oversight of the banking world, you know, continues to look potentially for more capital and more regulatory structure. A lot of that certainly is going to be focused on, you know, the regional mid cap banking system coming out of SVB. I think the large – banks have been an incredible source of strength. I don’t personally think that they need more capital. But I think there’s a risk that in this—
EISEN: But you’re preparing.
SOLOMON: Reevaluation, we’re preparing for that, and we can adapt for it. At the end of the day, you know, if you put more capital in the banking system, what ultimately happens is the cost of that capital is passed on to end users. And so that will take a little bit of time, but there’s no question that as you put more capital into the banking system, it does get passed on in terms of cost of lending and cost of capital.
EISEN: We’re clearly past the acute phase of this crisis, mini crisis, whatever you want to call it. What do you think is going to happen to regional banks in this country, and do you anticipate more failures?
SOLOMON: Well, there’s, there are long term trends that are in place here. And, you know, we’ve been very focused on the short term disruption, but I think you have to recognize that if you go back 25 years, there were 13,000 banks in the United States and today, they’re a little over 4,000. The reasons why that consolidation is pushed in the direction that it has, there’re pressures on banking institutions, especially regional midsize banking institutions, liability costs are going up obviously. The technology that’s necessary in a digital world scales much better with scale than it does in smaller businesses. That’s a cost and a headwind to returns and in addition, more regulatory burden is a headwind to return. So our research analysts talked about the fact that they see a three to 600 basis point drag on the ROEs of the mid cap and regional banking system given a bunch of these headwinds. You know, if that continues, I think they’ll have to be more consolidation or there will be, you know, some more institutions that have some pressure. Doesn’t have to mean that there’s a lot of, you know, there’s a lot of crisis around that, but, but I do think you have to watch that carefully. And you also have to understand that not everybody in the regulatory world or in Washington agrees that that consolidation is a good thing. And so, there’s a healthy debate going on in Washington as to whether or not that consolidation is a good thing.
EISEN: It feels like there’s a little bit of an opening of a window for bank mergers—
SOLOMON: On some fronts, on some fronts. I mean, I’m a big believer that there needs to be more banking consolidation.
EISEN: Are you interested in growing through acquisitions for Goldman Sachs?
SOLOMON: You know, I think the bar for us to make a bank acquisition would be extraordinarily high. We run a business that’s a slightly different business. We run a big global banking and markets business. We run a big asset and wealth management business, we’re going to continue to grow. You know, for us to buy a big, you know, infrastructure bank with branches and that infrastructure, that doesn’t fit strategically with where we are at the moment. We’re growing our private banking activities, that are continuing to hire private bankers, and obviously, given some of this disruption recently, there have been some interesting opportunities for us to hire individuals in that space. And so, you know, we’re looking at that, etc. I’d never say never. But that’s not a focus of ours at the moment.
EISEN: And finally, what is your focus level on AI and how to use generative AI with—
SOLOMON: Super, I mean, you know, Goldman Sachs has used AI in its business for a long time with these large language models, and generative AI super interesting, you know, for us. I think the thing that we’re most focused on is we have an extraordinary data set that’s proprietary to Goldman Sachs, and as our ability to build models around that data set, does that allow us to serve our clients in a much more effective way? And I think the answer to that is yes. And so we’re super interested in the way that technology can allow us with our proprietary data to strengthen the leading position that we have with our clients in businesses like banking and markets.
EISEN: We need a whole other interview for that topic, David, but I appreciate you taking the time here today.
SOLOMON: It’s my pleasure. Thanks for having me, Sara. It’s good to see you always.
EISEN: You too. David Solomon, the CEO of Goldman Sachs. Back over you David at the studio.
