How Goldman Sachs Makes Money

Goldman Sachs divides its financial services offerings into four categories.

Goldman Sachs, one of the world's leading investment banks and financial services companies, generates money through its four principal business lines: investment banking, global markets, asset management, and consumer and wealth management.

Among the financial institutions that earned public notoriety during the banking crisis of 2007-08, few landed on their feet quite like Goldman Sachs (GS). The subprime mortgage fiasco simultaneously benefited and hampered the Wall Street firm, affording it unusual profits while making it a target for enormous amounts of short-term credit courtesy of the Federal Reserve.

Goldman Sachs became a net borrower and an emblem of everything diabolical about high finance. Today, the firm sits atop a landscape of fewer, but larger, investment management and banking companies, each of them adept at making money by the billions.

On July 17, 2018, Goldman Sachs named David Solomon as the new chief executive officer (CEO), succeeding Lloyd Blankfein, who had run the company since 2006. The veteran investment banker took over on Oct. 1 of that year.

In 2020, Goldman Sachs generated $44.6 billion in net revenues, an increase from $36.5 billion the prior year. The company had an 11.1% ROE and 11.8% ROTE. As of Sept. 26, 2021, the firm has a market capitalization of $134.8 billion.

Key Takeaways

  • Goldman Sachs divides its activities into four primary segments: investment banking, global markets, asset management, and consumer and wealth management.
  • Goldman generated 44.6 billion in net revenues in 2020.
  • Although many financial institutions were irreparably damaged as a result of the 2008 crisis, Goldman Sachs has maintained its position as a global leader.

Goldman Sachs's Business Model

Goldman Sachs, with locations in 35 countries, divides its operations into four sectors: investment banking, global markets, asset management, and consumer and wealth management.

Investment Banking Business

Investment banking is the service that made Goldman Sachs equal parts famous and infamous. The investment banking segment includes such services as financial advice for companies of all kinds, equity underwriting, and debt underwriting.

In recent years, Goldman Sachs’ investment banking arm handled the initial public offerings for companies as diverse as meal delivery service Blue Apron (APRN), online auto marketplace CarGurus (CARG), and on-demand fuel delivery service company EzFill (EZFL).

One of Goldman Sachs’ largest IPOs in recent memory was for news outlet Twitter Inc. (TWTR) in 2013, which earned the firm more than $20 million. If that sounds small, it is. If that sounds too small, it isn’t.

Goldman Sachs and its partners did take a small 3.25% of the total money raised in the IPO, Goldman taking 38.5% of that amount. The firm’s intent was to handle a publicly-ballyhooed company’s initial sale for a discount in the hopes of attracting future business.

In 2020, investment banking operations brought in $9.1 billion in revenues, up from $6.8 billion the year prior.

Global Markets Business

Global Markets consists of services for Goldman's clients that buy or sell financial products, raise funding, and manage risk. Goldman functions as a market maker in this division. The company makes markets in the areas of fixed income, equity, currency, and commodity products. This segment also consists of activities in the futures and options markets.

As a market maker, Goldman provides liquidity and price discovery for the efficient movement of the markets. Clients in this segment are primarily large financial institutions that require the execution of transactions in both liquid and illiquid markets. This segment also involves providing clients with market research, trading ideas, and investment information.

The components of Global Markets are equities and fixed income, currencies, and commodities (FICC). Equities are stocks, where Goldman is involved in equity intermediation and equity financing. FICC products are interest rate products, such as bonds, credit products, such as credit derivatives, mortgages, currencies, and commodities.

Global markets brought in $21.2 billion in net revenues in 2020 for Goldman, its largest contributing business segment.

Asset Management Business

Asset management focuses on providing services to clients to preserve and grow their wealth. This area is the equivalent of investing in a fund.

Goldman manages client assets over a broad range of strategies, which include equity, fixed income, and alternative investments. Alternative investments include hedge funds, credit funds, private equity, currencies, real estate, and asset allocation strategies.

Goldman generates revenues from this segment through management fees, incentive fees, equity investments, and lending and debt investments.

Asset management brought in net revenues of $8 billion in 2020.

Consumer and Wealth Management Business

The last sector to talk about is wealth management, a necessary component of any successful investment bank. Wealth management is where a wealthy client or a representative of a large foundation or institution sits down with a Goldman Sachs professional in order to increase wealth, protect assets, and find ways to creatively and legally reduce taxes owed.

Compared to many of its competitors and other prominent financial institutions, Goldman Sachs employs few people, with the 2020 employee count at 40,500.

Wealth management includes financial planning, investment management, deposit taking, trust and estate restructuring, investment advisory solutions, and lending. Wealth management generates revenue from management fees, incentive fees, and private banking and lending.

Wealth management doesn't sound that technologically advanced—it isn't—but it requires specialized knowledge of a tedious subject. Few firms have the intellectual heft to manage clients’ gigantic investments. But Goldman Sachs is one that does.

Consumer and wealth management generated $6 billion in net revenue for Goldman Sachs in 2020.

Key Challenges and Future Plans

The 2008 financial crisis drove some large financial firms (e.g. Lehman Brothers) out of business. Others, like American International Group, Inc. (AIG) and Bank of America Corp. (BAC), survived only due to forced support from the American taxpayer.

Goldman Sachs falls somewhere in the middle. It received $10 billion through the Troubled Asset Relief Program, and even more than that indirectly through other TARP beneficiaries. Thirteen years later, Goldman Sachs is a robust company instead of a historical footnote.

Nonetheless, the company still faces stiff competition from a cadre of other prominent investment banks and major financial institutions. Further, regulatory measures governing investment banks are strict and always have the potential to become even more so in the future.

The COVID-19 pandemic did not hit Goldman that hard as witnessed by its 2020 performance that was better than its 2019 performance.

The company is focusing on three primary pillars for the future:

  1. "To grow and strengthen our existing franchise and capture wallet share across a wider range of clients;
  2. To diversify our products and services in order to build a more durable source of earnings;
  3. To operate more efficiently so that we can drive higher margins and returns across the organization."

What Exactly Does Goldman Sachs Do?

Goldman Sachs is a global investment bank and an investment management firm that provides many services to its clients. These include underwriting initial public offerings (IPOs), trading in fixed income, equity, currency, and commodity securities, investment advisory, wealth management, lending, financing, and asset management.

How Hard Is It to Get a Job at Goldman Sachs?

The difficulty in getting a job at Goldman will depend on the position being applied for. In general, being hired at Goldman is difficult as the firm is notorious for taking only the most exceptional candidates. Goldman has an acceptance rate of approximately 4%.

How Many Hours a Week Do You Work at Goldman Sachs?

The number of hours you work at Goldman Sachs will depend on the position you have at the firm. The longest hours are typically worked by junior investment bankers, those fresh out of college. These employees are known to work approximately 100 hours a week. In 2021, Goldman mandated that these employees are not to work on Saturdays any longer.

The Bottom Line

While no one can predict the future, Goldman Sachs’ short-term outlook will likely feature either continued profitability or continued government handouts, neither of which a prudent investor ought to bet against. The company is considered one of the best financial institutions in the world and has consistently proven itself financially.

Article Sources
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