Wall Street Diverges As Gorman And Blankfein Take Opposite Paths

One grew up in Brooklyn public housing, the son of a postal worker, and shared a bedroom with his grandmother. The other was born half a world away, in Australia, the son of an engineer and the sixth of 10 children in a comfortable Melbourne household.

One was a tax attorney who became a precious metals salesman. The other spent years at McKinsey & Co. before going into banking. One is short, bearded, and has a joke for every occasion. The other is tall, cleanshaven, and matter-of-fact.

They are Lloyd Blankfein and James Gorman, and they run the only surviving stand-alone investment banks in the U.S. -- Goldman Sachs Group Inc. and Morgan Stanley. They’re as different in appearance, personality, and style as the antipodes that mark their birth. And, while they still compete in many businesses, they’re steering their firms in opposite directions.

Gorman, 56, chief executive officer of Morgan Stanley, has put his chips on his bank’s retail brokerage. Blankfein, the 60- year-old CEO of Goldman Sachs, is betting the trading business that dominated Wall Street before the financial crisis will flourish again with fewer competitors around to enjoy the results.

For all their history, the firms are embodiments of their current leaders’ visions. Gorman, in the middle of his sixth year as CEO, pushed for a get-big-or-get-out strategy in wealth management even before he rose to the top and seized a chance to buy Smith Barney from Citigroup during the financial crisis. Blankfein, who’s starting his 10th year in command and had opportunities to change Goldman Sachs’s course, decided he liked the businesses he had.

Business Models

“There’s always been, in the recent period of time, some controversy over business models,” Blankfein told a business school audience in South Africa in April. In the past, many of the largest firms “you could have put into buckets. Now, everyone is almost a category of one.”

Even as trading languished across the industry in recent years, Goldman Sachs has outperformed Morgan Stanley by most financial measures. Its return on equity of 11.2 percent last year was twice as high, and it produced more revenue with 40 percent fewer employees. That’s led to a pay gap: Blankfein was awarded $126.6 million over the past five years, while Gorman received $74.8 million.

Turnaround Story

Still, investors have latched onto Morgan Stanley’s turnaround story, pushing its shares to greater gains than Goldman Sachs’s in back-to-back years for the first time since Goldman Sachs went public in 1999.

“People find Morgan Stanley really attractive because there is this transformation in place,” says Steven Chubak, an analyst at Nomura Holdings Inc. in New York. “The bull thesis on Goldman Sachs is that if anyone can adapt well to the current challenges, it’s going to be Goldman, because they have a proven track record of doing that time and time again.”

The differences between the two firms can best be seen in what each one has that the other lacks.

Morgan Stanley’s retail brokerage stretches from an office in Bangor, Maine, to one in Anchorage, Alaska, and serves 4 million customers who on average have about $500,000 with the firm. With 16,000 advisers, it has brought in $9.6 billion in pretax profit in the past five years without posting a losing quarter, has a 20 percent margin, and requires only $5 billion of regulatory capital. It’s a good fit with new banking rules.

Special Situations

For Goldman Sachs, the comparable money-making engine is the business that houses the firm’s investments. It’s largely composed of loans, stakes in its own private equity and hedge funds, and a secretive principal-investing team called the special situations group.

The human requirement is small, accounting for fewer than 10 percent of the company’s partners, but the investments, which include everything from distressed loans bought from European banks to a stake in an Israeli company that makes software for self-driving cars, have earned $15.2 billion in pretax profit during the past five years on a margin of more than 50 percent.

The segment requires more than $15 billion in regulatory capital, based on disclosures of risk-weighted assets, and posted a $2.6 billion loss in one quarter. New rules are forcing the bank to cut stakes in its own funds and decide whether it wants to replace them with direct investments.