WHEN: Today, Wednesday, February 13, 2019
WHERE: CNBC's "Closing Bell" – Live from the Goldman Sachs Technology and Internet Conference in San Francisco, CA
The following is the unofficial transcript of a CNBC EXCLUSIVE interview with Goldman Sachs CEO David Solomon and CNBC's Leslie Picker on CNBC's "Closing Bell" (M-F 3PM – 5PM) today, Wednesday, February 13th. The following is a link to video of the interview on CNBC.com: https://www.cnbc.com/video/2019/02/13/watch-cnbcs-full-interview-with-goldman-sachs-ceo-david-solomon.html.
All references must be sourced to CNBC.
WILFRED FROST: Welcome back. Goldman Sachs' tech conference is underway in San Francisco. Our own Leslie Picker is there and sitting down now with Goldman Sachs CEO David Solomon for an exclusive interview. Leslie, over to you.
LESLIE PICKER: Hey. Thanks, Wilf. David, thank you so much for joining us.
DAVID SOLOMON: Absolutely. Thank you for having me.
LESLIE PICKER: Obviously there are a lot of industry conferences that banks put on, but you chose to be at this tech conference and you've clearly, as CEO, been elevating people who have a tech focus. What -- how does tech fit into the bank's overall strategy and why are you here today?
DAVID SOLOMON: Well, I'm here at this conference because it's a fabulous event—a fabulous event with a large number of our clients here, we have over 1200 institutional investors here. And we're also hearing from a range of companies. We heard from Alphabet, we heard from Google, I know Chuck Robbins is speaking tomorrow from Cisco, I'm going to be talking to Marc Benioff later this afternoon, I spent some time with Sarah Friar who is running Nextdoor now and I believe spoke yesterday, Silver Lake was here. So there's a big collection of clients, but I've come to this conference for years even in past roles, because tech is extremely important in business activity, change, in competitive landscape, disruption. And I've always found it's a great place to come, listen, spend time with clients and really get a sense of what's going on. And so I've always enjoyed this. I get to San Francisco multiple times a year, just generally, given how important the community is out here to our business overall. And I'm glad to be back this year.
LESLIE PICKER: Now, one of the big topics out here in San Francisco, especially in 2019, is the IPO pipeline, a big part of which Goldman is reportedly taking a role in. Is there enough demand from investors to buy into all of the IPOs that are expected to come down the pike this year?
DAVID SOLOMON: When good companies come to market, there's always investor demand for good companies. And when I look at the pipeline right now. I think we're at a moment of time where, for a variety of reasons, that's a pretty significant pipeline of really terrific companies that are finally making the transition from having operated for a long period of time as private companies to the public market. I think we would have seen more of that happening in the early part of this year if not for the government shutdown. I think the government shutdown kind of pushed that out a little bit and we're going to start to see more moment up with respect to that. But I think when good companies come to market, if you have a good company to bring to market, there will always be investor interest and demand. And I think this pipeline is going to get a very, very strong reception from the market.
LESLIE PICKER: So you're saying the pipeline is good then?
DAVID SOLOMON: I think the pipeline is good. I think we've had a real evolution in the market with respect to private capital and public capital where now companies can, for a much longer period of time, fund themselves through private capital, as opposed to the public market. And that's delayed the process of bringing companies to the market for a longer period of time. There are both benefits and detriments to that but one of the results of that is when you do get these companies coming to market at this point, they're more developed, they're further along in their development, they're more known and I think creates great opportunities for investors to buy into some really terrific companies. So we're excited about the pipeline. It should be, if the market environment continues the way it looks today, it should be relatively good for IPOs, particularly here in the United States. Last year, we saw quite a bit out of China. 7 of the 11 significant tech IPOs that we saw last year came out China. We were a booker on all 7 of them. And so we saw a terrific amount of opportunity out of China last year in that context. So, I just think that is going to continue this year with more focus in the U.S.
LESLIE PICKER: Now you mentioned Washington, and one of the big policy moves that's getting a lot of attention these days, especially on the democratic side, is this idea of redistribution of wealth. What are your thoughts on that? Do you believe that the wealthy are being unfairly targeted these days?
DAVID SOLOMON: Well, I think distribution of wealth is an important issue and I think for sure, particularly coming up to a presidential election, there is going to be a lot of discussion on that topic and many others. And there are a number of other topics around taxes or policy that will continue to get debated. As we're focused on our clients and we're running our business, we don't really on a day-to-day basis listen -- we listen to the discussion, but we're concerned more about the current policy parameters are and how the current policy parameters evolve. I think there's reason to think about distribution of wealth and how we bring more people along in our society. I think that's something we've been very focused on at the firm in a variety of ways and I think it's important that corporations think about those issues. But I think we are coming into an election cycle. There will be a lot of discussion. We'll obviously listen to that. But we're more focused on operating and giving our client's advice on the current policy environment, not trying to imagine where things will be.
LESLIE PICKER: One of the big areas that people look at here is kind of closing that income gap and looking at raising taxes on the wealthy as the best way to do that. Do you agree that that is something that could improve the economy?
DAVID SOLOMON: Again, important issues that I think it's important, there's discussion and debate on. But over time, taking that discussion and the debate and particularly the discussion and debate that's driven by political process, it's actually policy that makes sense and really does the right thing – I've got a lot of confidence in our system that when it comes to making policy, we'll drive policy that really serves us best in the long run.
LESLIE PICKER: Do you think this ultimately becomes policy?
DAVID SOLOMON: You know, I'm not going to speculate on how the tax law changes and evolves. But I will notice that over many decades, we've had very few significant changes in tax policy. We've just had one. And so, you know, like everyone else, I'll listen to the discussion but we'll operate in the current policy environment and see what future policy changes come.
LESLIE PICKER: And you mentioned yesterday at another financial services conference that you believe that bankers will be increasingly targeted, you know, in this election season. Why do you believe that? And is this redistribution of wealth kind of part of that?
DAVID SOLOMON: Well, I think what I said was not that bankers would be targeted. I thought – I think that in the environment that we're in politically, banks still fresh out of the financial crisis, ten years is still a relatively short period of time, the narrative around the role that banks play in our society, which is a very, very important role around capital allocation, around lending to support businesses, create jobs, et cetera. I think the banking community can do a better job in talking about that and explaining that. But I do think in the electoral process, there will be certain components of those competing for office that will use that on their platform. Now whether nor not that converts to policy, you know, I don't know. But I think that will part of the dialogue. And our job is to serve our clients and operate around that, but it's not something on a day-to-day basis we spend time thinking about.
LESLIE PICKER: Alright. Wilfred back in the studio has a question for you. Wilf.
WILFRED FROST: Leslie, thanks very much. David, good afternoon. Thanks very much for joining us. Great to speak as always. I don't want to –
DAVID SOLOMON: Absolutely. Thanks, Wilf.
WILFRED FROST: Don't want to labor the tax issue too much, but I do want to talk about a slightly different one from what Leslie has been asking about, and that's buybacks. Your predecessor Lloyd Blankfein exchanged some Tweets with Senator Sanders the other day on the topic of buybacks, something you've been doing a lot of recently. And Mr. Blankfein framed buybacks as something that boosts the economy and jobs, whereas Senator Sanders said buybacks increase the wealth of billionaires, like Mr. Blankfein. What's your view on the topic?
DAVID SOLOMON: So, Lloyd is now in a positive – Lloyd has had strong views on lots of topics, and informed views and interesting views on lots of topics. He's now in an uninhibited position where he can talk about things as he sees fit. You on the topic of buybacks more generally, look: one thing we spend time talking to clients about is capital allocation, how they think about investment, how they think about returning capital shareholders through either dividends or through buybacks. And I think there's a balance that always has to be struck there. You know, companies are stewards of capital for their shareholders. They need to invest in their businesses. They need to invest in their people. Those are very important things that companies need to do. And that's got to be balanced with if they don't see the appropriate opportunities from an investment perspective, getting that capital back to shareholders in the most efficient way possible. And so this is different for every company. I know when we think about it at Goldman Sachs, we think a lot about how we invest in our people, invest our business, but also how we steward that capital for stockholders. And you know, I think it's a reasonable debate for any company to think about what's the right balance.
SARA EISEN: Hey, David, it's Sara. I have an economic question for you. So the market's clearly been very strong this year–
DAVID SOLOMON: Sure, Sara. How are you?
SARA EISEN: I'm good, thank you. But we are seeing some signs of slowdown in the U.S. economy. Auto delinquencies are rising. Small business optimism is fading. What's your read right now on whether we're slowing, and if so, how much?
DAVID SOLOMON: Well there's no question that the momentum of growth in the United State has definitely slowed, the trajectory is not quite as strong as it was a year ago. We're through, you know, part of the benefit of tax policy and tax change. And so there's no question that that trajectory is different than it was. That said, economic activity in the United States is still chugging along pretty well. I think we're in a position at the moment where we should see reasonable growth during the course of the year, let's say 2 to 2.25% growth, which is not bad. And so I think we're in a place where the chance of a recession in 2019 is actually quite small and the economic expansion should probably continue.
SARA EISEN: What about globally? How much has the picture deteriorated there?
DAVID SOLOMON: Well, there's no question that certain places around the world where that trajectory has slowed a little bit more and so obviously that contributes to the overall picture with respect to global growth. There's no question that growth in China has slowed, but yet I would say that growth in China is still you know, reasonable by any standard, even though it has slowed. And there's certainly pockets of Europe where we've seen a little bit of slowdown. But I think the comments I made broadly about the U.S., while not quite as strong, when you look at the overall global growth picture, I think things are still chugging along okay at this point in time and I don't see a lot of data to say that slowdown is accelerating or in any way, shape or form leading to global recession.
SARA EISEN: You know, related to all of this is how the trade war between the U.S. and China is solved. There's a lot of optimism in the markets. It sounds like President Trump wants to make a deal. If we did get that, what do you think that would mean to the markets and to the economy?
DAVID SOLOMON: Well, you know, I think, look, if you look at the start to the market year, coming off what was a difficult December, it's been a relatively good start to the year. I think part that have is over time, and you guys have reported this quite a bit in the last 24 hours, you know, the market is coming to a point of view that there will be progress on the trade talks. I think that's an important kind of next step for investors. They want to see that progress. And so, you know, to the degree that progresses, I think that's a positive sign for markets.
WILFRED FROST: David, I wanted to ask you briefly about the 1mdb scandal. And a theme that kind of came out of the earnings call but I don't think was fully clarified, do you feel like you have now already provisioned financially for what you guys have at the moment, your best estimate, for the worst case scenario?
DAVID SOLOMON: Yeah. As we said before, Wilf, you know, we have a responsibility in filing our financials to reserve what we feel is appropriate based on the facts that we have. Based on the facts we have today, we feel we're very appropriately reserved.
WILFRED FROST: And is that a single digit billion dollars number or is it double digit?
DAVID SOLOMON: As you heard on the earnings call, we disclosed what we added to our reserve, we disclosed our possible loss scenario and all that have is what we feel comfortable with at the present time, given information we have today.
WILFRED FROST: Okay. Moving on, on the same topic, recently you decided to withhold a portion of the 2011 incentive packages from three former senior executive employees. The board decided to do that. What was the reason behind it? Is there some implication they were complicit on the scandal itself or just they didn't really do their oversight jobs back when this wrongdoing was committed?
DAVID SOLOMON: No, no implication of that whatsoever. The board took an action to defer, as they were permitted to, to defer compensation that was owed to certain executives based on the fact that they wanted to see this all played out. But there was no, in any way, shape or form of implication, in any way, shape or form to any of those executives that that was the case.
WILFRED FROST: So why were the three —
DAVID SOLOMON: They deferred it, Wilf.
WILFRED FROST: I know, but why were three people singled out?
DAVID SOLOMON: The three were the only three that had that particular award. So everybody else that had that award was retired or cashed out of that award. They were the only three that had that particular award. They were the only three executive officers that had that. And so the board, as they were entitled to, decided to defer decision into paying that award until this is all resolved and that was a board decision.
WILFRED FROST: And finally, David, on the topic, I haven't actually had a chance to speak with you directly on this topic yet, and I know you can't go deep into the details but given that you kind of personally did build the debt capital market and have been head of the investment bank in the past, what level of personal guilt do you feel and personal annoyance with the whole thing that did unfold back in 2013?
DAVID SOLOMON: Well I think, Wilf, I've been very, very clear that I was outraged that we had somebody at the firm that acted in such a criminally difficult -- criminally inappropriate way. That acted in a way, shape or form doesn't meet the standards of behavior that we expect, the level of integrity we expect, broke the law, became a criminal. So I'm outraged by that, as are all partners of Goldman Sachs. So this process will play out, as we've said. We're working to bring a resolution to it. And hopefully we can get that done in an appropriate way, in short order.
LESLIE PICKER: Alright, David, I have a question, more strategically about bank M&A broadly. We saw the SunTrust BB&T merger last week. WisdomTree reportedly held talks with JP Morgan. There's even some news out just today that Goldman was in talks with the boutique bank and those talks fell apart over M&A. Do you expect to see more financial services mergers in 2019 and can we expect to see Goldman to play a role in that?
DAVID SOLOMON: Well, obviously the BB&T SunTrust deal was a big deal. We played a role as adviser in that transaction. And it was a significant consolidation transaction. We haven't seen one in quite some time. I think one of the things that was interesting about it is the stocks of both companies reacted well, kind of indicating that the market would see lots of consolidation. There are regulatory issues that can strain as you move further up the market cap spectrum the ability to see more consolidation. You saw Morgan Stanley do an interesting add-on acquisition over the course of recent weeks. As for Goldman Sachs, we'll continue to look for opportunities to broaden our franchise with add-on transactions as we have, for example, in the wealth management business. But we're really focused on continuing to grow our business with respect to the initiatives that we have. I do think M&A activity broadly will continue at pace in this environment. And I think financial services will have a reasonable contribution to the overall M&A mix. With respect to the article out today about our looking at a boutique investment bank –
LESLIE PICKER: William Blair was the bank—
DAVID SOLOMON: I'm actually not aware of those discussions occurring. But we're very focused on expanding our footprint which is something that we do organically by adding bankers and building out our ability to cover a broader array of companies.
LESLIE PICKER: Now the reverse, we talked about add-ons, and potentially pulling back on part of the business, it was reported that you all were scaling back on your commodities business. Are there any other areas that we can expect to see shift under your leadership?
DAVID SOLOMON: Sure. You know, we are looking at all of our business, and we have been on record talking about a review kind of front to back of all of our businesses and opportunities to refine them. With the commodities business, we're very committed to serving our clients in the commodities space but that business has evolved a little bit. We thought it was an appropriate time to refocus on certain areas where our clients really have needs from us in the commodities business and others where there wasn't really good client demand to refocus some of those resources on other parts of the business. So we're always looking at our businesses through the eyes of what do our clients need and how can we best refine those businesses to serve our clients well? And that's an ongoing process that we'll continue.
LESLIE PICKER: Alright. David Solomon, CEO of Goldman Sachs, thank you so much for joining us from your conference. Really appreciate it.
DAVID SOLOMON: Thank you so much for having me. Appreciate it. Thanks.
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