Gary Cohn, the No. 2 executive at Goldman Sachs Group Inc., has just come from meetings with people overseeing hundreds upon hundreds of billions of dollars.
After arriving in Toronto this week for a Goldman-run conference, he had dinner with the chief executive officers of three of the country's largest pension funds and the head of RioCan Real Estate Investment Trust. He had breakfast with the incoming head of Royal Bank of Canada. In between, he met with two other bank CEOs and conferred with the head of the Ontario Securities Commission. Canada is a key market for Goldman, and he and the firm's Canadian head, Jack Curtin, wanted to see as many big clients and important contacts as possible.
Then Mr. Cohn took a break to sit down for a 45-minute interview to talk about the firm's challenges.
This is the new face of Goldman Sachs. Where once the company was a quietly elite group that shunned the press and avoided a public profile to concentrate on profits, the investment bank is now actively revealing itself to the world in an attempt to counter some of the blows absorbed in and after the financial crisis.
"Somehow we became synonymous with Wall Street. Whether it was deserved or not, I'm not going to argue with you," said Mr. Cohn, settled on a couch in Toronto's Shangri-La Hotel. "I obviously don't think we were, but it is what it is. I do believe we have made a lot of steps forward. We've been a lot more open, a lot more transparent."
The crisis was not kind to Goldman. With its stock plunging, Goldman was forced to turn itself into a bank in 2008 – accepting more regulation in return for a perception of stability. It was forced to take government aid, and it turned to billionaire Warren Buffett for a cash infusion that helped to restore confidence.
Still, the firm weathered the financial tempest much better than many competitors. Goldman was in the first group of major financial institutions to pay back the money it got from the government's Troubled Asset Relief Program. While other banks such as JPMorgan Chase & Co. and Bank of America have had huge litigation settlements over such issues as mortgages, Goldman's have been relatively minor.
However, the company's stock is only worth about 60 per cent of what it was at its peak before the 2008 financial crisis. And the company's reputation has taken an even bigger beating than its stock.
Goldman didn't do the one thing – handing out dodgy mortgages – that really got America in trouble, but it was involved in the daisy chain that turned those mortgages into investments that later went sour. The bottom came in 2009 when Rolling Stone polemicist Matt Taibbi famously dubbed the company a "vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money."
Suddenly, what had been Goldman's strengths were now seen as weaknesses. The company's huge and heretofore steady profits and pay packages fed the public's perception of greed. Goldman's tendency to stay out of the press and concentrate on business was taken as a cloak of secrecy. The presence of Goldman alumni in key jobs ranging from U.S. Treasury Secretary (Hank Paulson) to Governor of the Bank of Canada (Mark Carney) was interpreted as evidence of a Goldman plot to control the levers of power.
As the crisis drew to a close, Goldman decided it had to approach business differently and dial back its aggressiveness, the edge that it once had.
"Not only should we look at can we do something, we look at should we do something," Mr. Cohn said. Before 2008, "what we didn't do as well is we didn't go through 'Just because we can do this transaction, should we do it?' Now we spend an equal amount of time on 'Should we?' "
Mr. Cohn said the company's new discretion has "put us into some very tough situations lately. We've withdrawn from some businesses and withdrawn from some opportunities out there in the world because we decided we shouldn't do that type of business because the brand and the reputation was too valuable."
What things did it reject? The firm doesn't like to talk about it. It does not want to be seen as disparaging potential clients who might one day want to do business with Goldman again.
One senior executive who has regularly hired Goldman to help with transactions says there's no doubt the firm has changed. Goldman is now more willing to put reputation before profit. The executive said that Goldman is not being purely altruistic – the firm just knows what works in today's market.
The new Goldman can even be funny. For many months recently, it has been lampooned by a Twitter account (@GSElevator) that purports to report things heard in elevators at Goldman offices. The anonymous tweeter was invariably unflattering in his portrayal of investment bankers' gilded lifestyle. (Here's a recent, tame example: "When life gives you lemons, order the lobster tail.")
In response, Goldman played the situation for a joke, helping to defuse the situation. When The New York Times revealed in February the identity of the person behind the Twitter account, the firm drolly commented that "we are pleased to report that the official ban on talking in elevators will be lifted effective immediately."
But funny does not make money. The new Goldman is unlikely to ever be as profitable as the old Goldman. Rather than minting the enormous returns that it regularly did before the financial crisis, its challenge now is simply to earn enough to justify the cost of doing business.
Balancing risk and returns
Goldman's businesses span trading of all sorts of assets, from bonds to stocks to currencies. The firm will advise on takeovers, arrange financings in stock and debt markets, and help companies hedge by structuring derivatives. Those businesses are all still in demand. In Canada, Goldman is a sought-after merger adviser. The company is adding to its Canadian operations to beef up its ability to trade local stocks.
However, Goldman cannot make as much money as it once did for the simple reason that it cannot take as much risk. Regulators have demanded that banks reduce the use of borrowed money, the key in "levering up" returns. They also demand that firms such as Goldman hold more cash on hand. That means keeping money in low-returning investments that can be turned quickly into cash.
The new rules make the system safer, but kill returns. Goldman's return on equity, a key measure of profitability for securities firms, is about a third of what it was at its peak. In 2006 and 2007, ROE topped 30 per cent. In the past two years, the key ratio has fallen just shy of 11 per cent. Given that many estimate the cost of equity for Goldman at about 10 per cent – the baseline level of returns that investors demand to own the stock – the returns Goldman is putting up are simply not high enough.
While the stock has been a solid performer in the past two years, analysts are cool on it. Of the 34 analysts polled by Bloomberg, only nine rate it a buy.
Mr. Cohn thinks that returns can and will be higher. He paints necessity as a virtue: "If you take the fact that we think we can get to higher returns than we have now in a much less risky business, it becomes a more valuable business over time."
To generate higher returns, Goldman will have to find ways out of a competitive squeeze. It's regulated as a bank, but it has no retail branch network. Thus, unlike rivals such as JPMorgan, it does not have huge reserves of deposits to draw on for funding. Goldman has to borrow money in more expensive money markets to fund its business.
In addition, Goldman has been pushed out of some lucrative trading and securities businesses by regulation. Those are now largely the province of unregulated asset managers.
Goldman must reshape its business to fit this new landscape. For example, the proprietary trading businesses for which Goldman was once well known are gone, shed in anticipation of regulatory crackdowns.
Mr. Cohn worries about the fact that much of the business that was once done by investment banks, and which got investors into trouble, is likely to appear again in the parts of the financial world that regulators don't touch – the so-called shadow banking system.
Goldman is no longer looking at building as many highly leveraged investment products. "We have reduced the lab where we used to have all these people creating and engineering these things."
But he expects risky products to pop up again, likely from the unregulated funds that Goldman competes with. He likens it to squeezing a balloon. As regulators apply pressure in one spot, the risk moves to where there is less pressure.
"If the past has any reference to the future, which it has for the past multiple hundred years in the financial services industry, you should bet that at some point in the future these products will all reappear. They will be called something else."
Commodity pit to president
Mr. Cohn's bespoke suit and loafers say banker, but his broad-shouldered, thick-chested physique is the kind of build that helps make a successful trader in the rough-and-tumble pits of the commodity business. He career spans both roles.
Born in 1960, he grew up in suburban Cleveland, the son of a real estate developer. He coped with dyslexia well enough to win admission to American University's business school in Washington, D.C. After graduating in 1982, he found himself back home.
In a commencement address at his old university in 2009, he said he lacked interviews and prospects. He was "having a great time," until one morning his father walked into his room at 6:30 a.m.
"I had been in bed for about an hour, I think, and [he] said, 'what are you going to do with the rest of your life.' I ironically told him, 'you're looking at it.' That did not go over very well in my house."
Job-hunting followed shortly thereafter. Mr. Cohn ended up at United States Steel, selling siding and window frames.
On a business trip to Long Island, he went to the commodities exchange in New York. After spending the day wondering how to land a job there, he saw a trader heading to the airport. He offered to share a cab, and on the way to La Guardia he talked his way into an interview the following Monday.
"I literally got home Friday night and my first stop on the way from the airport was the bookstore. I bought the McMillan Options as a Strategic Investment book and read it four times – as I said, dyslexic guy read it four times over the course of the weekend and came back in and interviewed and was offered a job. That's how I started in the financial services industry."
He began by trading silver. From the commodity pits, he was recruited by Goldman, where he has remained for the past 24 years. He rose through the commodities trading side of the business, and made partner in 1994, four years after joining. By 2003 he was head of the firm's global securities business.
Today, as president, chief operating officer and a member of Goldman's board, Mr. Cohn earned $12.5-million (U.S.) in 2012. He is one of the handful of internal candidates mentioned as possible successors to Goldman's CEO, Lloyd Blankfein. (Until recently, that group also included a Canadian, J. Michael Evans, but he has since left the firm.)
What Goldman will look like when Mr. Blankfein eventually passes control is not clear.
If regulation is holding back Goldman's returns, that problem is unlikely to be resolved any time soon. Mr. Cohn argues that it took 11 years for the last of the major securities laws to be put in place after the crash of 1929 – and the 2008 crisis was more complicated because it involved much more than just stocks. He knows there is likely much more rule-making to come.
"As far as we can understand where the regulatory world is going, we feel like we have done a good job of adapting to the new world. But we are also acutely aware that the environment in the regulatory world is always changing."
If the regulators and firms like Goldman have missed something, and the world faces another financial mess, Mr. Cohn is well aware that all the public relations in the world may not save the company from another drubbing.
"I feel like we're in a much better position now but I'm not naive. I understand that the world could change tomorrow and that if something goes wrong in the world and people want to write about Wall Street, they are still going to potentially pick on us."