The Business Of

Banking | Goldman Sachs | What Do They Do?

Morning All!

Hope you had a great week. So, last time we finished our 2-week series on The Business Of Sharing. And we broke down the business models of Airbnb and Uber.

This week we start a new 3-week series and I’m super excited for it because it’s not the easiest industry to understand. But it’s one that I’m sure the majority of readers will have thought about working in. We’re going to be diving into The Business Of Banking!

Over the next 3 weeks, we’re going to be looking at these 3 massive companies;

• Goldman Sachs – mainly an investment bank. The 5th biggest bank in the US.

• Barclays – mainly a retail bank. The 3rd biggest bank in the UK.

• Charles Schwab – mainly an investment broker. #1 stock brokerage in the US.

Now, you’ll notice I used the word ‘mainly’ in all of the above descriptions. Because all 3 of these companies are involved in several parts of banking. Today, let’s look at Goldman and see what exactly they do. And I really think you’ll enjoy the next 3 weeks. So, without further ado… !

Goldman Sachs: The Investment Bank

Okay, so let’s start with the obvious. When you hear Goldman Sachs, you probably don’t just think ‘bank’. You think ‘investment bank’. But what do investment banks actually do? Well, we’ll keep it high-level today. And go into more detail tomorrow. But basically, there’s 3 main functions for the investment banking division at Goldman. And they are;

That might not mean loads to everyone. So, let’s look at some examples. When Microsoft decided to acquire Activision Blizzard in 2022, who did they turn to in order to advise them on the deal? Goldman Sachs’s M&A team. When Amgen decided to sell $24 billion in debt earlier this year, who did they turn to in order to help them structure the offering? Goldman Sach’s DCM team.

And when Arm decided to IPO just a couple of weeks ago, who did they need to help them in the IPO process? Goldman Sach’s ECM team!

Tomorrow we’ll dig a lot deeper into how exactly Goldman ‘helps’ in these situations. And we’ll see how Goldman makes money from carrying out these services!

Goldman Sachs: The Market Maker

Okay, so another big part of Goldman’s operations is market making (often called trading). And this is basically what it sounds like – it’s where the investment bank helps create a market for an investor.

As an example, let’s say a fund at Ninety One (an asset management company) has £100m worth of Tesla shares and wants to sell them. And let’s say there’s another fund (at Schroders) that’s more optimistic on Tesla and wants to buy £100m worth of Tesla shares. Who helps facilitate this trade? A market maker! A market maker like Goldman Sachs will know who’s looking to buy and sell certain assets. And so Goldman in this situation would buy the shares from Ninety One and sell them to Schroders!

Now, it’s not always this straightforward. But we’ll dive into much more detail tomorrow and think about how Goldman actually makes money from being this middleman!

One other thing about market making for today though. We just used the example of Goldman buying and selling Tesla shares. But market makers can make markets on all kinds of financial products. I imagine most of us reading this will have seen The Big Short film - if not, please go and watch it! Well, towards the start of the movie, there’s the below scene where Christian Bale (Michael Burry) goes into Goldman Sachs and wants to buy credit default swaps on mortgage bonds.

Now don’t worry about what on Earth credit default swaps on mortgage bonds are! But what Michael Burry was asking - to buy credit default swaps on individual bonds - there wasn’t really a market for that! It didn’t exist at the time. But Goldman Sachs, Deutsche Bank, and other big investment banks made that market for him.

What a lot of people may not realise is that, whilst Michael Burry made millions from this investment as the US housing market collapsed in 2007/08. Goldman Sachs also made millions billions! Because as we said earlier, the market maker’s job isn’t just to sell something or buy something. It’s to buy AND sell. Goldman Sachs were just the middleman who had Michael Burry on one side, buying these swaps, and other investors on the other side, selling these swaps. More on this tomorrow!

Goldman Sachs: The Asset Manager

Alrighty, so we’ve looked at Goldman Sachs’s investment banking and market making operations. And those two segments will be our main focuses this week. But I’ll just touch on one further thing Goldman does. And that’s investment management. For the TBO readers who’ve looked in our Archive, this part of the business, shouldn’t be too unfamiliar – because we’ve already covered the asset management business model in The Business of Ninety One.

Like Ninety One, Goldman Sachs Asset Management manages money for pension funds, sovereign wealth funds and high net worth individuals. But whilst Ninety One manages ~$150 billion worth of client’s assets. Goldman Sachs manages a whopping ~$2.7 trillion, making it the 7th largest asset manager in the world!

Goldman Sachs: The Retail Bank?

Okay, just before we wrap up, I’ll quickly mention Marcus – Goldman’s retail bank. Now, I’m not going to mention Marcus in the newsletter tomorrow (How Do Goldman Sachs Make Money). One, because we’ll be diving into retail banking extensively next week in The Business Of Barclays. But two, because Marcus might not generating revenue for Goldman Sachs much longer!

However, on Thursday, we’ll be talking in-depth about the reasons behind WHY Goldman entered the retail banking space. Why did this investment banking giant, who deals with the biggest companies in the world, want to start working with people like me and you?! Well, knowing the reasoning behind Goldman’s entrance will give us a greater understanding of how their overall business works!

23rd Oct 2023

Nigel Jacob CFA