When Wall Street’s co-heads cannot cohabitate

Shortly after I started as an investment banker my employer appointed a co-head of investment banking to work alongside the incumbent. Within a year both left. As one senior mentor noted: “In investment banking you can be co-headed one day and beheaded the next.”

That memory flooded back after MainFT reported last week that Goldman Sachs’s co-heads of M&A and European investment banking were threatening to quit over their exclusion from a powerful committee set up by CEO David Solomon:

Two of Goldman Sachs’ top investment bankers have threatened to quit after being excluded from a new operating committee established under chief executive David Solomon, according to people familiar with the matter. 

Mark Sorrell, the London-based co-head of mergers and acquisitions and son of advertising executive Sir Martin Sorrell, and Gonzalo Garcia, co-head of European investment banking, have told Goldman they may leave after being excluded from the committee, the people said. 

Their respective co-heads — Stephan Feldgoise in mergers and acquisitions and Anthony Gutman in European investment banking — have been included in the committee, which has about a dozen members . . . 

The source of the latest unrest is two new operating committees for investment banking and trading established by Solomon this year. They sit below Goldman’s top-tier management committee. Both Sorrell and Garcia were left out of the investment banking committee, the people said.

Co-head arrangements have long been a feature of investment banks where leadership aspirants outnumber the available management roles. Of course, this dynamic exists in other industries as well, but for some reason it is more common in finance. And no one loves co-head arrangements like investment banks. Private equity firms, asset managers, legal partnerships and the like occasionally have co-heads, but not nearly to the same degree.

Maybe it’s because of near-permanent transition planning in a business where people can easily walk out the door for a sweeter offer elsewhere, or simply the need to oversee often disparate and sprawling businesses.

Whatever the reason, the set-up involves a carefully calibrated decorum: co-heads make joint announcements and copy each other on emails. Even if they don’t get along, they are compelled to present a united front, and colleagues in turn know to loop them in together. They are equal on paper, although in practice one co-head may be paid more or have de facto more power.

What’s unusual with the FT scoop is that the pretence of equality seems to have been dropped entirely: nobody can be bothered to keep up appearances, and the facade of joint leadership has crumbled.

It’s futile for a Muggle to parse through the palace intrigue at Goldman Sachs. Any large organisation has a complex web of factions, feuds and fealties. There’s no way to get anything more than a partial picture of what’s happening.

If even the US government — with the world’s most extensive and best-resourced intelligence network — couldn’t navigate the clan loyalties and tribal allegiances in Afghanistan, what hope does an outsider have in understanding alliances and rivalries within an investment bank, let alone Goldman Sachs?

Moreover, these ructions scarcely matter if you don’t work at Goldman Sachs. Regulators will be largely unperturbed: the potential departure of a couple of London-based advisory bankers has no credible impact on the operational integrity or capital strength of what is a Global Systemically Important Bank.

And shareholders won’t be too fussed, either. Goldman Sachs stock has outperformed its peers under David Solomon’s reign. “The share price is not representative of the sentiment inside the bank,” a disgruntled European banker told MainFT, sounding surprised and disappointed that the market cares more about the bank’s ROE than the bankers’ woe.

In any event, such purges and power struggles arise whenever there’s a downturn. Investment banks have now suffered through two consecutive years of feeble revenues in corporate advisory and capital markets. The non-US parts of the businesses in particular have slowed considerably, and expensive overseas bankers on high fixed pay can seem like an unaffordable luxury. Although activity is expected to recover this year, costs are still out of whack, and it’s inevitable that bank chiefs will slim down management ranks.

It’s not nice and not pretty, and politics sometimes trumps merit. But it happens at every bank, and for all the colourful personalities, the causes and catalysts are fundamentally structural. The flipside is that bankers care a lot less about operating committees and grand titles when compensation is high and abundant.

A year ago, the FT’s Editorial Board said in a column on Goldman Sachs: “The fundamental problem is that banking just is not what it was, even for Wall Street behemoths.” Goldman Sachs stopped being a partnership in 1999 and stopped taking outsized risks after the 2008 financial crisis. With the investment banking fee pool plumbing new lows, there just isn’t the money to keep every banker and shareholder happy.

The recent ruckus simply shows that Goldman Sachs has become a lot like the other major investment banks, albeit still with a top league table position. The only anomaly here is that the discontent is playing out in public.

Usually everyone strives to maintain a veneer of cohesion and professionalism. Organisational changes are carefully choreographed, and internal announcements are meticulously drafted and vetted by numerous parties. Bank leaders spend a lot of time ensuring smooth transitions and forestalling open displays of acrimony. As president Lyndon Johnson said in declining to remove FBI Director J. Edgar Hoover: “It’s probably better to have him inside the tent pissing out, than outside the tent pissing in.”

However, occasionally the rancour can’t be contained, and bitterness boils over. It’s upsetting to be shunted aside in favour of a peer who you think has played politics at your expense and hasn’t produced as much as you have. Meanwhile, aggrieved managing directors carrying tales of woe will always be warmly welcomed by financial journalists.

If nothing else, the current commotion at Goldman Sachs serves as a reminder that malcontent multimillionaire bankers can air their grievances through the media much more easily than, say, wrongly accused sub-postmasters in East Anglia.