WHEN: Today, Thursday, October 17, 2019
WHERE: CNBC's "Closing Bell" – Live from the Goldman Sachs Builders + Innovators Conference in Santa Barbara, CA
The following is the unofficial transcript of a CNBC EXCLUSIVE interview with Goldman Sachs Chairman and CEO David Solomon and CNBC's Wilfred Frost on CNBC's "Closing Bell" (M-F 3PM – 5PM) today, Thursday, October 17th. The following is a link to video of the interview on CNBC.com: https://www.cnbc.com/video/2019/10/17/watch-cnbcs-full-interview-with-goldman-sachs-ceo-solomon.html.
All references must be sourced to CNBC.
COURTNEY REAGAN: Financials out with earnings this week. Goldman, J.P. Morgan, Bank of America all higher so far as bank executives report upbeat outlooks about the economy including the consumer. Our very own Wilfred Frost is at the Goldman Sachs Builders + Innovators Conference. He joins us now along with David Solomon for an exclusive interview. Wilf, over to you.
WILFRED FROST: Hey, Court. Thanks so much. As you said, I'm here with the Chairman and CEO of Goldman Sachs David Solomon. David, good afternoon. Great to be with you.
DAVID SOLOMON: It's good to be with you, as always.
WILFRED FROST: And we're here, as Courtney just said in the intro, at your Builders + Innovators Conference. It's the eighth year, I believe.
DAVID SOLOMON: The eighth year.
WILFRED FROST: Tell us about the conference and also, how it's evolved over those sort of eight years.
DAVID SOLOMON: Sure. This is, since 2012, an event we have each year out here in Santa Barbara when we bring together about 125 or so founder or entrepreneurs who are building big businesses. All different types of businesses. Some are more progressed in their life cycle. Some are newer businesses but interesting ideas. To give you an example, you go back to 2012 and that first year, two of the companies that were here as young companies were Dropbox and Uber. So, it gives you a sense of a lifecycle a little bit. But, these are interesting businesses. They are changing the world, changing the way we do things. They are hiring people, adding jobs. And I really come away from this event every year energized and really feeling good about the fact that, with everything going on in the world, the innovation and entrepreneurial culture in the United States that is so important for job creation and growth is alive and well. And we really spend some time trying to get to know some of these companies and allow these different entrepreneurs to connect on some of their experiences. And see how they can grow and learn to help them move forward.
WILFRED FROST: Well, we are definitely going to dive into some of those themes you're alluding to there. But first of all, we were here together a year ago. This is essentially a year since you took over as CEO. Do you feel like the first year was a year of transition for Goldman Sachs?
DAVID SOLOMON: Well, it was certainly a new job for me. And I would say just thinking about fact that we sat here a year ago, certainly went quickly. Because it feels like I was sitting here with you just ten minutes ago. But I think back to October of last year, and one of the first things I did when I started as CEO last October was to take a group of people inside firm and get them focused on how we face clients as an organization. And we started talking about this concept of 1 GS. And we've always been a client organization. But there's really been an opportunity over the course of the last year to always think about how we can improve, how we can do better and how we can really think about making sure that our clients are getting the best of Goldman Sachs. And so, I feel we've accomplished a lot on that in the context of the first year. And I also feel good about the fact that the investments that we're making to kind of evolve the organization and move the organization forward, are really progressing nicely. We've got a great management team. It's really come together on a medium and longer-term plan. And so, I feel like for our first year, that feels pretty good.
WILFRED FROST: We -- the investments -- you talked a lot about, the earnings call which came out a couple of days ago, those earnings did miss expectations, revenue was down 6%. And you spoke on the call about the impact on the short-term earnings that some of the investments in new areas---Marcus, Apple Card, transaction banking— are having you, I think you said $450 million worth of those investments made this year. How long are you asking investors to stick with you—to give you faith before those investments pay off?
DAVID SOLOMON: What we're really trying to do and we have to do, I don't think we have a choice, is we're focused on our existing businesses and we're also focused on making investments to evolve the organization and move it forward. We think about they investments as medium and long-term investments and we try to be transparent and clear that as we build these new platforms we're making progress. But these are things that will take a number of years to really materialize the potential. I talked on the call a little bit about how he built an asset management business going back to the 1980s. and if you think about the asset management business we have across the world today, I look back at our investing platforms which we started to build in 1980s. Goldman Sachs is celebrating their 150th anniversary and we're building businesses for the long-term value of our shareholders and the firm. And so, this will take some time. We're trying to be as clear and transparent as we can. But there are milestones we're excited about that we cross this year and feel we'll continue to make progress.
WILFRED FROST: Were some of these changes in investments ones that perhaps could have been made sooner by your predecessor?
DAVID SOLOMON: Well, I think that some of these started with my predecessor. If you look what we're doing from a digital banking perspective, that started with my predecessor. But these things a long time to progress and to really come to fruition. And what we're focused on now is looking at our client, the different clients we have around the world, corporations and governments, institutions and individuals and saying, how can we do more as Goldman Sachs for those clients and really make the investments to broaden it out? So, I feel good about the course we're on and good about the progress we're making.
WILFRED FROST: In a meeting that was reported by Bloomberg, your deputy John Waldron supposedly said that the old management was slow to make changes. Do you disagree with that?
DAVID SOLOMON: I think the new management is very focused on making changes to move us from here. And to be honest, with everything that's going on, I don't have a lot of time to look back and debate what should have, would have, could have in the context of where we've been. You know, Goldman Sachs has performed very well over a long period of time. And we're working hard as a management team to take the firm forward.
WILFRED FROST: On the Marcus, you were at an event in June and my colleague Hugh Son was there and you said: we're getting absolutely no credit from anybody in the investing community about it yet. If we were out in Silicon Valley and made 20% of the progress we've made, people would be throwing money at us. Are you annoyed the public markets haven't given you more of a valuation or more reward for what you've done and what you've innovated?
DAVID SOLOMON: I'm not annoyed. I just expect and understand that in the context of a large public company like this it's going to be a, 'Prove it' on this. And I said this on the earnings call, but I feel very good about it and I think the team has executed incredibly well. Over the last three years we built a digital bank with $55 billion dollars of digital deposits, with $5 billion of loans, 4 to 5 million customers, a brand-new credit card platform, and have launched a card with Apple. I feel that's pretty good progress over a short period of time and we've invested over a billion dollars to get that. But if you looked at all that, would you invest a billion dollars to get that? Absolutely. You'd invest more. So, again, we're building for the long-term. I feel good about the progress that we're making. Would I be pleased if the world recognized it sooner? Sure. But I don't expect that, though. I know that we have to deliver and the onus is on us to deliver over time for our shareholders. And I'm confident we will do that.
WILFRED FROST: You said on the call that the launch of the Goldman Sachs Apple Credit Card was the most successful credit card launch ever. Can you qualify that for us with some numbers?
DAVID SOLOMON: Sure. I said that we believe it's the most successful credit card launch, co-branded credit card launch ever. And there are a couple things that I'd look at, that I talk about. The first is we can look and see all the past credit card launches over the first month, six months, year. What were number of cards that came in and then we can look at the number of cards we have and we're ahead of the pace of all of those.
WILFRED FROST: How many?
DAVID SOLOMON: I'm not going to give you that piece of information at this point, but I appreciate you asking. Second we can look at the credit formation and how people are using the card. And what i would say all the early data indicates people really liked the card. In fact, you and i were sitting here having a conversation and you were telling me how much you like the card and how it was changing your behavior.
WILFRED FROST: I'm not sure that was on the record, David. But, sure.
DAVID SOLOMON: But I –
WILFRED FROST: I'm not going to reveal what you said for that. Lucky you.
DAVID SOLOMON: I like it. I like the card. And the next thing is we look at the credit quality that's coming in. You know, the credit quality is it an aspirational card. And the credit quality is coming in quite good. So, over time we will, obviously, give more data. We're only less than two months into it. But all the data we see is actually doing quite well compared to the data we have available from other launches.
WILFRED FROST: Is this and Marcus the tip of the iceberg as far as and in terms of your disruption of consumer banking? Or are you halfway through?
DAVID SOLOMON: We're -- I think we're in the early stages of building a digital platform for consumers that gives them more information, more tools at their disposal. We were talking a little bit about the data set, you know, inside that apple card when you look at your phone how much information you have. I think this is our version 1.0 and I think regardless of Goldman Sachs or whoever is doing it, the quality of the information, the data, the ability to manipulate it, that financial consumers are have going forward is just going to be highly improved. And this is early stages.
WILFRED FROST: Let's talk about some macro. Has corporate optimism been damaged severely by the trade war?
DAVID SOLOMON: I think that -- I think there's no question that a combination of macro factors has had an impact on sentiment. Whether it's trade, whether it's Brexit, whether it's a little bit more uncertain geopolitical environment, I think there's no question that it's having an impact on sentiment. On the other hand, the overall nature of global growth, while a little bit decelerated from a year ago, is still okay. It's still solid. And in the context of that, if some of these issues—if we had a trade deal, if we in some way, shape or form did make progress on Brexit, if there was a Brexit deal here—you know, I think that could swing sentiment back, you know, quite quickly. But there is no question, when I talk to CEOs, they are a little bit more concerned or agitated about the noise but are trying to stay focused on the substance.
WILFRED FROST: In terms of the Fed, we saw the spike in the repo rates recently. Was that due to post-crisis liquidity capital rules that restricted you as banks' ability to stabilize the market? Or--
DAVID SOLOMON: Well, there's no question that the regulatory construct had an impact on the available liquidity at that point in time. It was definitely a contributing factor. I know the regulators are focused on that and spending time on that. And like a lot of other things that regulators are taking a closer look at now that we're kind of ten years past the crisis, this is something that deserves a little bit of focus.
WILFRED FROST: And in terms of whether or not the Fed should keep cutting, you said of late on a podcast internally that negative rates are a failed experiment. So, do you hope they don't go anywhere near that level or are we already low enough?
DAVID SOLOMON: I continue to think there will be consequences, you know, in the long-term for negative rates, as an experiment. I certainly hope in the U.S. there's never a consideration of negative rate policy here in the U.S. I think it's interesting to see where we are in the economic cycle, where we are from a job perspective, and just balance the policy that we have today. You know, personally I'm not a Fed governor but personally I've been surprised still by at that point of monetary policy or kind of the low rate environment that we still have in this point in the cycle. I would have expected something slightly different. But we'll have to watch and see as we run through the cycles as to where that goes. But negative rates are not something -- when we look back at history and write the book on that, I'm not sure that will be a good chapter.
WILFRED FROST: You mentioned Brexit. Boris Johnson has a deal with EU. Now he needs to get it passed from parliament. How much big a difference does that make to Goldman Sachs in London if he gets that deal passed and we have an orderly Brexit?
DAVID SOLOMON: I -- we're very committed to London. But we're also committed to the continent. We spent a lot of time, both for ourselves and for our clients really, thinking about making sure under any scenario we're prepared to operate seamlessly and we feel good about that. There's obviously an enormous amount of uncertainty along this issue for a long time. And so, I'm encouraged that it sounds like there's a deal. I understand the vote is still, you know, unclear as to how exactly how the vote will play out. But I'm hopeful that the vote will carry. And this would be good to get some of this uncertainty removed, and for everybody moving forward, I think it would be a good outcome -- a positive outcome.
WILFRED FROST: Let's talk about WeWork. In your recent earnings, you lowered the valuation you carry, your investment in WeWork in your books, down from 150 million to 70 million. Over 50% write down. What level of valuation does that leave WeWork at, at the top level of the company?
DAVID SOLOMON: We don't -- we're not going disclose how we mark our individual positions. But, obviously, that was an investment we made a number of years ago at a lower valuation. Over time as the company as running processes and setting prices for liquidity we, along with a number of other investors, took some liquidity in that investment. But we still have an investment that's left. I think Stephen Scherr our CFO has said on the earnings call that at the current mark even if it went down from here we still have a profit in the remaining position. But we'll be watching that situation like everybody else and it will be interesting to see as they refocus the business how that business moves forward. But there is a real business that underlies that.
WILFRED FROST: How do you think about the conflict of interest that you have a direct private investment in the company—you're also responsible for marketing or were responsible for marketing the IPO to new public market investors. You want a high valuation based on your direct investment and versus a legitimate valuation for new public market investors. How do you weigh that conflict of interest?
DAVID SOLOMON: We've been an investor for years and years and years, and we've got a lot of experience in managing the fact that we have a broad investment portfolio, both for clients and ourselves, and that we're in the capital markets. In the context of this situation, this was an investment that was made at the very, very early stage of the company. Of course, we want that investment to do well, but at the same point in time we have a duty to investors as an intermediary to price IPOs so they work in the market. And those are two separate parts of the business. And we've always operated successfully through that.
WILFRED FROST: Sure. And I know both of those types of businesses have gone on for a long while. But I guess this is a very high-profile example of where that all broke down. The S1 that was filed--
DAVID SOLOMON: Well, I'm not so sure it broke down. Why do you say they're broke down?
WILFRED FROST: Well, the IPO went away.
DAVID SOLOMON: Oh, the IPO broke down. I'm sorry, I thought you were talking about the process.
WILFRED FROST: Well, let me put it this way. This S1 of which you were the lead underwriter on and co-leader underwriter and signed off on the S1 had the founder owning buildings where the company was a tenant, the founder taking multiple personal loans from the company at very low rates, the founder charging for the use of the name 'We,' all-board – all-male board directors, dual-class chair structure that many people have questioned. You, I know care a lot about corporate governance. And yet you endorsed this S1 and a high valuation which if investors had gone for you would have sort of approved in one sense, whilst also being a private market investor. Do you think there are no conflicts of interest there whatsoever and are you happy with how that all played out?
DAVID SOLOMON: Well, there are always conflict of interest for an organization like ours, and we do our best to make sure we're transparent where those conflicts exist. With respect to this particular situation, I think what's unfortunate about this and it's a little bit of an adjustment broadly speaking with respect to the IPO process, there's been a lot of focus on growth at all costs. I think IPO market is pivoting and getting much more focused again on growth with a path to profitability. I think as there's been focus at growth at all cost there's a more 'lax approach than I personally think is appropriate on governance. And I think that's getting corrected a little bit. And so, even though this played out publicly, I do think that the process ultimately brought the company to a place where it may or may not would have been public. But the process which was feedback from investors, feedback from banks, including ourselves, basically said this won't work unless you get it to a different valuation, different governance. Some of the things that you mentioned were changed through the IPO process and would have been different if the company had gone public. And the public never saw the valuation that the banks and underwriters were telling the company we thought that the valuation had to be in order to actually go public. So, it played a little bit more publicly than that process you normally would like it to play out. But I think at the end of the day the market process worked.
WILFRED FROST: So, moving forward, perhaps, the lessons learned from this—whether it was Uber before it as well which had some corporate governance which played out publicly—do you think that you guys across the board in the investment banking space should work earlier with these companies to get rid of those cooperate governance question marks so they don't come up again?
DAVID SOLOMON: Well, I think -- look, our job is not to be the rule maker for what the public markets accept or don't accept in terms of governance, value, et cetera. It's our job to try to suggest over time what we think makes sense for investors and for markets broadly. And so that process will continue. We'll try to play our role in that process. But ultimately the market makes judgments around these things as to what's appropriate, what's not. If you go back 20 years ago, there weren't a lot of super high voting stocks. And today, for a lot of these founder companies, there are. And in fact, there have been a lot of people that have advocated that there's benefit to that. We'll see over time whether or not the market changes its view, but that's an evolutionary process. And our job in that process is to bring buyers and sellers, or the companies and investors together in an appropriate balance process and we'll continue to do that.
WILFRED FROST: I want to switch focus and talk about some of the other strategy changes, most notably the shrinking number of partners at the bank. That's got quite a lot of attention in the press. Talk us through what's going on there.
DAVID SOLOMON: I joined Goldman Sachs in 1999 as a partner. And so, I have 20 years' experience watching the natural process of the Goldman Sachs partnership evolving cycle to cycle. We run two-year partnership cycles as you're aware. And I naturally have watched that over time. And what's interesting is I can go back, you know, 18 years ago, I can go back 15 years ago, I can go back five years ago. The process right now looks no different than any other cycle. I know it's getting a lot of visibility right now. I think part of that might be because we had a leadership transition in the firm, and so at the time of the leadership transition there's a little bit more focus. But there's no change in that evolution. Part of the culture of the partnership is to constantly be giving younger people in the partnership opportunities to step up and have bigger jobs and that natural process is going on over the course of the last cycle.
WILFRED FROST: David, as we wrap things up here, we're coming up to the 150-year anniversary of the founding of Goldman Sachs, which you mentioned at the top of the interview. What does that milestone mean to you, and are you proud to be the leader of the firm as it crosses that milestone?
DAVID SOLOMON: Well, this year has been the 150th anniversary. And we've tried with clients around the globe to celebrate and commemorate that history. I'm humbled and proud to have the opportunity to lead the firm at this moment, and the event of the 150th really reminds you that this has been a very versatile firm, it's been a nimble organization that over a very long period of time has found a way to add value, survive and thrive. And so, I view my job and the leadership team's job all of us, the partnership of the organization, our job is to continue to carry that legacy forward. And it's a big responsibility. But we're excited about the opportunities we see. And excited about our ability to serve our clients in an ever-changing world.
WILFRED FROST: David, it's always a pleasure to sit down with you. Thank you for your time.
DAVID SOLOMON: Absolutely. Thank you, Wilf. I'm glad to be here.
WILFRED FROST: David Solomon. Chairman and CEO of Goldman Sachs. Guys, back to you.
For more information contact: