Goldman Sachs, one of the world's leading investment banks and financial services companies, generates money through its four primary operating segments: investment banking, institutional client services, investing and lending, and investment 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. It as a part of the ProShares UltraPro Short S&P500 ETF.

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.

According to its 2018 annual report, Goldman Sachs generated more than $36.6 billion in net revenues for 2018, with 13.3% ROE and 14.1% ROTE. As of this writing, the firm has a market capitalization of $74.8 billion.

Goldman Sachs' Business Model

Goldman Sachs, with locations in over 30 countries, divides its operations into four sectors: investment banking, institutional client services, investing and lending, and investment management.

Key Takeaways

  • Goldman Sachs divides its activities into four primary segments: investment banking, institutional client services, investing and lending, and investment management
  • Goldman generated more than $36.6 billion in revenues for 2018
  • 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' 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 advisory 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 social media giant Snap (SNAP), real estate listings website Redfin, fashion subscription retailer Stitch Fix (SFIX), meal delivery service Blue Apron (APRN), and online auto marketplace CarGurus (CARG). In 2018, the firm aimed to add coverage for more than 1,000 new companies.

One of Goldman Sachs’ largest IPOs in recent memory was for news outlet Twitter Inc. (TWTR) in 2013, which earned the firm $23 million. If that sounds small, it is. If that sounds too small, it isn’t. Goldman Sachs and its partners did take a paltry 3.25% of the money Twitter raised in the IPO, but the firm’s intent was to handle a publicly-ballyhooed company’s initial sale for a discount in the hopes of attracting future business. It seems to have worked. Investment banking generated $7.86 billion for Goldman Sachs last year, about 7% higher than 2017.

Goldman Sachs' Institutional Client Services Business

Measured by both revenue and profit, the largest of those sectors is institutional client services, which serve institutional clients (not client services of an institutional nature). It’s a corporate way of defining Goldman Sachs’ market-making activities. Goldman Sachs takes large positions in certain stocks (as well as options, futures, and other derivatives), which it can then sell—thus guaranteeing, or at least facilitating, a market in said securities. Institutional client services earned Goldman Sachs $13.48 billion in 2018, about 37% of the firm's revenue. Institutional client services earnings are up more than 13% from 2017.

Goldman Sachs' Investing and Lending Business

Investing and lending is where Goldman Sachs enjoys the highest returns on its efforts. An investment bank is, after all, a bank. Goldman Sachs lends money to its corporate clients and also has a department that offers secured loans to wealthy individuals. Think originating loans, but only for a pool of borrowers with stellar credit and the wherewithal to pay back every cent of debt. There’s a reason why lending as Goldman Sachs does it is more remunerative than how the neighborhood loan shark does it. The former’s operations are less messy, too.

Goldman Sachs’ own investments include real estate holdings, debt, and the same stocks that ordinary folks buy, but on a far greater scale. Investing and lending earned the firm $8.25 billion in 2018, 14% higher than in 2017.

Goldman Sachs' Investment Management Business

The last sector to talk about is investment management, a necessary component of any successful investment bank. Investment management is where a rich client or a representative of a large foundation or institution sits down with a Goldman Sachs professional and says, “Grow my nest egg,” “Keep me one step ahead of the taxman,” or “How can we get my ex-husband’s hands off my money?” Investment 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.

Much of the revenue in this segment comes from incentive fees, paid by shareholders to fund managers for their ability to not destroy or weaken the investments. Investment management generated $7.02 billion in revenue for Goldman Sachs last year, comparable to the numbers for every segment except institutional client services.

Future Plans

According to its most recent annual report, Goldman Sachs' future plans include strengthening existing business by deepening existing client relationships and providing new business capabilities to better serve returning and new partners. The company specifically aims to increase some of its fee-based and recurring revenue streams, while at the same time achieving enhanced operating efficiency firm-wide.

A Complete Overhaul

Beginning with the CEO transition in the fall of 2018, Goldman has undertaken a major review and potential overhaul of each of its four primary segments. Expect that the company will continue to revise and enhance its offerings in order to better suit a growing client base, without necessarily changing its fundamental business strategy.

Key Challenges

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 do 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. 10 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. 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.