How Goldman Sachs Makes Money

Goldman Sachs, one of the world's leading investment banks and financial services companies, generates money through its three principal business lines: Global Banking & Markets, Asset & Wealth Management, and Platform Solutions. Let's dive a little deeper into how Goldman Sachs makes money.

Understanding Goldman Sachs

Among the financial institutions that earned public notoriety during the banking crisis of 2007-08, few landed on their feet quite like Goldman Sachs (GS). The subprime mortgage fiasco simultaneously benefited and hampered the Wall Street firm, affording it unusual profits while making it a target for enormous amounts of short-term credit courtesy of the Federal Reserve.

Goldman Sachs became a net borrower and an emblem of everything diabolical about high finance. Today, the firm sits atop a landscape of fewer, but larger, investment management and banking companies, each of them adept at making money by the billions.

On July 17, 2018, Goldman Sachs named David Solomon as the new chief executive officer (CEO), succeeding Lloyd Blankfein, who had run the company since 2006. The veteran investment banker took over on Oct. 1 of that year.

In 2023, Goldman Sachs generated $46.3 billion in net revenues. The company had a 7.5% return on equity and an 8.1% return on tangible equity. As of Sept. 6, 2024, the firm has a market capitalization of $151.5 billion.

Goldman Sachs's Business Model

Goldman Sachs, with locations all around the world, divides its operations into three segments: Global Banking & Markets, Asset & Wealth Management, and Platform Solutions.

Global Banking & Markets

Global Banking & Markets includes investment banking fees, which include advisory, equity, and debt underwriting fees, fixed income, commodities, and currencies (FICC), intermediation and financing activities, acquisition financing, and investing activities. Investment banking is the service that made Goldman Sachs equal parts famous and infamous.

Goldman Sachs’ investment banking arm handled the initial public offerings for companies as diverse as meal delivery service Blue Apron (APRN) and online auto marketplace CarGurus (CARG).

One of Goldman Sachs’ largest IPOs was for news outlet Twitter, Inc. (now X. Corp) in 2013, which earned the firm more than $20 million. If that sounds small, it is. If that sounds too small, it isn’t.

Goldman Sachs and its partners did take a small 3.25% of the total money raised in the IPO, with Goldman taking 38.5% of that amount. The firm intended to handle a publicly ballyhooed company’s initial sale for a discount in the hopes of attracting future business. In 2023, Global Banking & Markets generated revenues of $30.0 billion, which was an 8% decline from 2022.

Asset & Wealth Management

Asset management focuses on providing services to clients to preserve and grow their wealth. Goldman generates revenues from this segment through management fees, incentive fees, equity investments, private banking and lending, and equity and debt investments.

Goldman manages client assets over a broad range of strategies, which include equity, fixed income, and alternative investments. Alternative investments include hedge funds, credit funds, private equity, currencies, real estate, and asset allocation strategies.

Asset & Wealth Management brought in net revenues of $13.9 billion in 2023, a 4% increase from 2022.

Platform Solutions

Platform Solutions is a new segment for the firm after reorganizing its business into these three new segments in 2022. This segment includes consumer platforms, such as credit cards and point-of-sale financing, and the transaction banking business. This segment saw net revenues of $2.4 billion for 2023, an increase of 58% from 2022.

Key Challenges and Future Plans

The 2008 financial crisis drove some large financial firms (e.g. Lehman Brothers) out of business. Others, like American International Group, Inc. (AIG) and Bank of America Corp. (BAC), survived only due to forced support from the American taxpayer.

Goldman Sachs falls somewhere in the middle. It received $10 billion through the Troubled Asset Relief Program, and even more than that indirectly through other TARP beneficiaries. Since then, Goldman Sachs is a robust company instead of a historical footnote.

Nonetheless, the company still faces stiff competition from a cadre of other prominent investment banks and major financial institutions. Further, regulatory measures governing investment banks are strict and always have the potential to become even more so in the future.

The COVID-19 pandemic did not hit Goldman that hard as witnessed by its 2020 performance that was better than its 2019 performance.

The company focused on three execution priorities for 2024:

1. "To continue to be a trusted advisor to our clients;
2. "To be an employer of choice for our people; and
3. "To generate mid-teens returns through the cycle and strong total shareholder return."

The Bottom Line

While no one can predict the future, Goldman Sachs’ short-term outlook will likely feature either continued profitability or continued government handouts, neither of which a prudent investor ought to bet against. The company is considered one of the best financial institutions in the world and has consistently proven itself financially.