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Business

Goldman Sachs Cut CEO David Solomon’s Pay to $25 Million in 2022

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Goldman Sachs Group Inc.

GS 0.07%

Chief Executive

David Solomon

took a nearly 30% pay cut in 2022.

Mr. Solomon received $25 million in total compensation last year, down from $35 million in 2021. His 2022 pay package consisted of a $2 million base salary, a cash bonus of $6.9 million and a $16.1 million stock award that is tied to how well the bank performs in the next few years, Goldman said in a regulatory filing.

Mr. Solomon’s 2022 compensation reflects the bank’s performance compared with 2021, Goldman said in the filing. Profit fell 48% last year, and revenue declined 20%, largely due to a slowdown in corporate deal-making that had previously fueled blockbuster earnings. Still, Goldman shares outperformed the KBW Nasdaq Bank Index and the broader S&P 500 last year. 

In 2021, the bank’s shares were soaring and the bank was minting money in a merger boom that kept its high-price bankers busy. 

Goldman doubled Mr. Solomon’s pay that year, an acknowledgment of the bank’s record profits and following a year when he was penalized for the firm’s involvement in the 1MDB corruption scandal. The bank also awarded Mr. Solomon a one-time stock award of about $30 million that year, citing “the rapidly increasing war for talent in the current environment.”

Late last year, Mr. Solomon engineered a restructuring of Goldman’s businesses meant to spotlight steadier businesses like asset and wealth management, taking some of the focus off its more volatile Wall Street operations. 

He’s also paring back the bank’s consumer-facing Marcus operations and has admitted that Goldman’s attempts to do too much there contributed to missteps. The bank’s newly created Platform Solutions division, which houses credit cards and other pieces of the consumer business, lost about $2 billion on a pretax basis in 2022. 

Mr. Solomon has moved to cut costs at Goldman. The bank laid off some 3,000 employees this month and slashed bonuses for many bankers by up to 40%. 

Goldman’s compensation committee also considered the bank’s “continued progress in its strategic evolution as well as Mr. Solomon’s strong individual performance and effective leadership,” according to the filing. 

Mr. Solomon’s pay fell more than his Wall Street counterparts. 

Morgan Stanley

paid Chief Executive James Gorman $31.5 million for his work in 2022, a 10% pay cut from the year before.

 JPMorgan Chase

& Co. awarded CEO Jamie Dimon $34.5 million in 2022 compensation, in line with a year earlier.

Wells Fargo

& Co. CEO Charles Scharf’s 2022 pay also stayed flat at $24.5 million in 2022.

Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com

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Business

Goldman Sachs Lost $3 Billion on Consumer Lending Push

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Goldman Sachs Group Inc.

GS 1.10%

said a big chunk of its consumer lending business has lost about $3 billion since 2020, revealing for the first time the costly toll of the Wall Street giant’s Main Street push. 

Ahead of fourth-quarter earnings next week, Goldman released financial information that reflects its new reporting structure. The bank in October announced a sweeping reorganization that combined its flagship investment-banking and trading businesses into one unit, while merging asset and wealth management into another.

Marcus, Goldman’s consumer-banking arm, launched in 2016 to a strong start.

Rivals

JPMorgan Chase

& Co. and

Bank of America Corp.

were posting big profits on the back of strong consumer businesses that carried them through rocky stretches in their Wall Street operations. Goldman, long reliant on its gold-plated investment banking and trading arms, wanted in on the action.

The bank rolled out savings accounts, personal loans and credit cards. Its 2019 credit-card partnership with

Apple Inc.

signaled its ambitions to be a big player in the business.

Goldman invested billions of dollars in Marcus. But it struggled to bulk up the credit-card business following an early win with the Apple Card. A long-awaited checking account never materialized.

Economists and financial analysts look at bank earnings to get a sense of the economy’s health. WSJ’s Telis Demos explains how inflation as well as recession concerns can be reflected in their results. Illustration: Lorie Hirose

The consumer unit was never profitable. In October, Goldman formally scaled back its plan to bank the masses.

The reshuffling parceled out the consumer business to different parts of the bank.

Before the shift, it was under the same umbrella as Goldman’s wealth-management division. 

Much of Marcus will be folded into Goldman’s new asset and wealth management unit. Some pieces, including its credit-card partnerships with Apple and

General Motors Co.

, as well as specialty lender GreenSky, are moving into a new unit called Platform Solutions.

Goldman on Friday disclosed that its Platform Solutions unit lost $1.2 billion on a pretax basis in the nine months that ended in September 2022. It lost slightly more than $1 billion in 2021 and $783 million in 2020, after accounting for operating expenses and money set aside to cover possible losses on loans. The unit also includes transaction banking, with services such as enabling banks to send payments to each other, vendors and elsewhere.

Goldman shares closed up about 1% Friday at $374.

The bank said it set aside $942 million during the first nine months of 2022 for credit losses in Platform Solutions, up 35% from full-year 2021. Operating expenses for the division increased 27% during this period. After hovering around record lows for much of the pandemic, consumer delinquencies are rising across the industry.

Net revenue for Platform Solutions’ consumer platforms segment, which reflects credit cards and GreenSky, totaled $743 million during the first nine months of 2022, up 75% from all of 2021 and up 295% from 2020. Goldman completed its acquisition of GreenSky last year. 

The disclosure didn’t reveal financial details for Goldman’s consumer deposit accounts, personal loans and other parts of Marcus. Those business lines are included in the firm’s asset and wealth management division, which is profitable, and aren’t material to the firm’s overall profits, according to people familiar with the matter. 

Goldman is in the process of winding down personal loans, according to people familiar with the matter. It will be ending its checking account pilot for employees, one of the people said, while it considers other ways to offer the product. One possible option is pitching the checking account to workplace and personal-wealth clients.

As recently as the summer, Goldman executives were saying the checking account would unlock new business opportunities for the bank. 

Marcus has been a divisive topic at Goldman. Some partners, senior executives and investors were against continuing to pour billions of dollars into the effort, in particular for checking accounts and other products that Goldman would be developing on its own.

Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com and Charley Grant at charles.grant@wsj.com

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World

Saudi Conference Draws Wall Street Executives Amid Strained Ties With U.S.

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RIYADH, Saudi Arabia—International business leaders brushed aside a diplomatic spat between the U.S. and Saudi Arabia, converging on the Saudis’ flagship investment conference in a kingdom riding high on an oil-price boom and trying to flex its geopolitical power.

Some 400 American executives descended on Riyadh’s Ritz-Carlton Hotel for the Future Investment Initiative, an annual event sometimes dubbed “Davos in the Desert,” along with European and Asian business leaders. Among them: JPMorgan Chase & Co. Chief Executive

Jamie Dimon,

David Solomon,

head of

Goldman Sachs

Group Inc., and

Blackstone Inc.’s

Stephen Schwarzman.

The large American presence—over 150 U.S. companies were represented—came three months after President Biden visited Saudi Arabia in a bid to reset relations that were badly damaged following the 2018 murder of dissident journalist Jamal Khashoggi by Saudi operatives. Many international firms had already turned the page on the outrage over Mr. Khashoggi’s death, which hung over subsequent runnings of the event. But for those that hadn’t, this year’s conference offered a chance to come back.

“Nobody is being told not to come to the kingdom,” said Tarik Solomon, a former chairman of the American Chamber of Commerce in Saudi Arabia. He said U.S. companies were unfazed by the political situation between Washington and Riyadh.

The executives arrived amid a low point in relations between the Biden administration and Saudi leadership, including Crown

Prince Mohammed

bin Salman, who The Wall Street Journal reported Monday has mocked the U.S. president in private. The Saudis frustrated the Biden administration by orchestrating an oil-production cut earlier this month with the Organization of the Petroleum Exporting Countries and its Russia-led allies, prompting the U.S. to threaten retaliatory measures.

The U.S. perceived the production cut as supporting Russia’s war effort in Ukraine by allowing Moscow to sell oil at inflated levels. Riyadh has said the move was a technical decision that was needed to prevent a drop in crude prices amid gloomy economic predictions.

Messrs. Dimon and Schwarzman were two of the executives who backed out of the 2018 event in Saudi Arabia. JPMorgan and Goldman are among the Western banks that have profited from a buoyant Saudi initial-public-offerings market at a time when IPOs globally have stagnated. Citigroup Inc., JPMorgan and Goldman also were among the banks that helped PIF with a debut bond sale earlier this month, which raised $3 billion for the fund.

Mr. Dimon said he believed the problems between the U.S. and Saudi Arabia were overblown and would eventually be worked out. “I can’t imagine every ally agreeing on everything all the time,” he said.

“American policy doesn’t have to be everything our way,” Mr. Dimon added later. “You can learn from the rest of the world.”

High-level U.S. officials were missing from the conference, which promoted the slogan: “A New Global Order.” Throughout the first morning of the conference, Saudi officials stressed the importance of building relations with powers around the world while saying the U.S. relationship remained important.

Khalid al-Falih,

the Saudi minister responsible for luring foreign investment, said the dispute with Washington was “a blip.”

“We’re very close and we’re going to get over this recent spat that I think was unwarranted but it was a misunderstanding hopefully,” he said on a panel.

The Saudi energy minister,

Prince Abdulaziz bin Salman,

struck a more defiant note, defending the oil-production cut as a necessary move—not only to stabilize the oil market as the global economy cooled but also to keep the kingdom on track to meet its economic goals.

President Biden met with Crown Prince Mohammed bin Salman in Saudi Arabia, as the U.S. looks to reset relations and prod the kingdom to help control oil prices. Biden said he confronted the crown prince about the killing of journalist Jamal Khashoggi. Photo: Bandar Aljaloud/EPA/Shutterstock

“We keep hearing, you are with us or you are against us,”

Prince Abdulaziz

said. “Is there any room for: ‘We are for Saudi Arabia and for the people of Saudi Arabia?”

The kingdom is flush with cash from high oil prices and is intent on seeing through Prince Mohammed’s transformational economic plans. The conference is organized by the Saudi Public Investment Fund, a sovereign-wealth vehicle that has grown from a sleepy holder of state-owned companies to a $600 billion global investment powerhouse that is increasingly a source of capital for Wall Street.

Saudi Arabia, in recent years, has tried to use the conference as an annual marker of the progress of economic and social changes first announced by Prince Mohammed in 2016. The summit has often been overshadowed by geopolitical events, most notably in 2018 when Western senior executives canceled participation following Mr. Khashoggi’s killing.

Former President

Donald Trump

stood by Prince Mohammed even after the U.S. intelligence community said he likely ordered the killing—a charge he denies. Mr. Trump’s son-in-law,

Jared Kushner,

developed a strong tie with the prince and this year received a $2 billion injection from PIF. Mr. Kushner spoke Tuesday at the conference in remarks full of praise for the Saudi leadership.

The U.S.-Saudi tensions are a reason for companies to be concerned, said Hasnain Malik, a Dubai-based equities analyst at Tellimer Research, citing businesses that fell out of favor because of disagreements between the American government and Russia and China.

Share Your Thoughts

What are you watching for in Saudi Arabia’s flagship investment conference? Join the conversation below.

“Foreign financial actors still regard Saudi as an opportunity for taking capital out of Saudi and putting it into the rest of the world, rather than looking at Saudi as an interesting opportunity,” Mr. Malik said.

Foreign investment in Saudi Arabia has remained stubbornly low in recent years, despite Prince Mohammed’s efforts to restructure his economy. International firms have complained about slow payment from government contractors, retroactive tax bills and archaic bureaucracy.

Domestically, PIF has launched dozens of projects, including plans to build a futuristic city in the northwest of the kingdom that will require billions of dollars of outside capital alongside investment from the sovereign-wealth fund. The government announced national strategies in the past week aimed at attracting billions of dollars in investments from the industrial and supply-chain sectors by offering companies massive incentives. With one of the fastest-growing economies in the world, the Saudi government is racing to achieve its goals now.

One bright spot, so far, is PIF’s attempts to support car manufacturing in the kingdom: An investment in electric-vehicle maker Lucid Motors has resulted in plans to set up a factory domestically to reassemble the company’s luxury sedan that is pre-manufactured in its Arizona plant. The company aims eventually to produce complete vehicles in Saudi Arabia, and the government hopes it will draw in other industrial firms to create a domestic supply chain.

Lucid opened a Riyadh showroom on Monday. “It’s a chicken and egg problem, isn’t it? If we haven’t got suppliers, we haven’t got a car company, so we’re gonna break that,” said Lucid Chief Executive

Peter Rawlinson.

Write to Rory Jones at rory.jones@wsj.com, Stephen Kalin at stephen.kalin@wsj.com and Summer Said at summer.said@wsj.com

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Business

Goldman Plans Sweeping Reorganization, Combining Investment Banking and Trading

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Goldman Sachs Group Inc.

GS -2.31%

plans to fold its biggest businesses into three divisions, undertaking one of the biggest reshuffles in the Wall Street firm’s history.

Goldman will combine its flagship investment-banking and trading businesses into one unit, while merging asset and wealth management into another, people familiar with the matter said. Marcus, Goldman’s consumer-banking arm, will be part of the asset- and wealth-management unit, the people said.

A third division will house transaction banking, the bank’s portfolio of financial-technology platforms, specialty lender GreenSky, and its ventures with

Apple Inc.

and

General Motors Co.

, the people said.

The reorganization could be announced within days, the people said. Goldman is scheduled to report third-quarter earnings Tuesday.

It is unclear how the makeover will shake up Goldman’s senior leadership team, though at least a few executives will have new roles, the people said.

Marc Nachmann,

the firm’s co-head of trading, will slide over to help run the combined asset- and wealth-management arm, they said.

The reorganization is the latest step in Chief Executive

David Solomon’s

push to shift Goldman’s center of gravity toward businesses that generate steady fees in any environment. It also reflects the firm’s struggle to overcome skepticism, from investors and even among some of its own executives, over its ambitions for consumer banking.

The firm’s trading and investment-banking acumen has been Goldman’s calling card for decades, churning out massive profits when the markets favored risk-takers and bold deals. But investors often discounted those successes, reasoning that they are harder to sustain when market conditions turn. And in recent years, Goldman has sought to sharpen its trading arm’s focus on client service.

Following the changes, Goldman’s organizational chart will look more like its peers.

A slide presentation from Goldman’s 2020 investor day offered a glimpse of what a combined banking-and-trading business would look relative to peers. At Goldman, the merged group would have delivered a return on equity of 9.2% in 2019, besting

Morgan Stanley

and

Bank of America Corp.

but below what

JPMorgan Chase

& Co. and

Citigroup Inc.

earned that year.

Bloomberg News earlier reported that Goldman had planned to restructure its consumer-banking arm and was considering combining its asset- and wealth-management businesses.

Goldman’s shares have struggled to keep pace with its rivals, at least by one measure. The firm traded at 0.9 times book value as of June, according to FactSet. That compared with 1.4 times at Morgan Stanley and 1.3 times at JPMorgan.

Goldman has sought to narrow the gap by beefing up the businesses that command higher valuations on Wall Street. Managing wealthy people’s money and overseeing funds for pensions and other deep-pocketed institutions is more profitable than other financial services, and it usually doesn’t put the firm’s balance sheet at risk. And many investors view traditional consumer banking—taking deposits and making loans—as more predictable.

Goldman has invested heavily in building its own consumer bank, and folding the unit into its asset- and wealth-management arm should create more opportunities to offer banking services to wealthy individuals.

Earlier this year, the bank said it aimed to bring in $10 billion in asset and wealth-management fees by 2024.

Write to Justin Baer at justin.baer@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Appeared in the October 17, 2022, print edition as ‘Goldman To Fold Businesses Into Three Divisions.’

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Business

Peloton Co-Founder John Foley Faced Repeated Margin Calls From Goldman Sachs as Stock Slumped

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John Foley,

the co-founder and former chief executive of

Peloton Interactive Inc.,

PTON -3.41%

faced repeated margin calls on money he borrowed against his Peloton holdings before he left the fitness company’s board last month, according to people familiar with the situation.

As Peloton’s shares slumped over the past year,

Goldman Sachs Group Inc.

GS -2.11%

asked Mr. Foley several times to provide fresh funds or additional collateral for personal loans the bank had extended to him, the people said. The company’s share price has fallen nearly 95% from its $160 peak in December 2020.

Resigning from the board gave Mr. Foley flexibility to sell or pledge more Peloton shares, though he said the margin calls weren’t the reason he left the company.

“I didn’t resign from the board because I was underwater,” he said. “To the extent that I took on debt through Goldman, it was because I am bullish on Peloton and still am. It was and is a great company.”

The former chairman and CEO had pledged as collateral about 3.5 million Peloton shares as of the end of September 2021, or about 20% of his stake at the time, securities filings show. The pledged shares were worth more than $300 million a year ago. At current prices, they are worth roughly $30 million.

Peloton has cut thousands of jobs this year to stem its losses.



Photo:

John Smith/VIEWpress/Getty Images

Mr. Foley was able to secure private financing and avoid stock sales by Goldman, the people said. He declined to say on Monday how much of his current stake had been pledged or how much he had borrowed against his holdings.

His seat on the board limited his ability to raise additional funds because most public companies prohibit directors and executives from selling their shares during certain trading periods. In addition, Peloton’s policy limits pledges for margin loans by directors or executives to 40% of the value of an individual’s shares or vested options.

Mr. Foley’s decision to leave the board on Sept. 12 followed a tumultuous several months at the company he co-founded a decade ago, as well as a sharp decline in his personal wealth as Peloton’s sagging fortunes diminished the value of his holdings. His stake in the company, worth $1.5 billion a year ago, is currently worth less than $100 million.

“Everyone can see I had a rocky year,” Mr. Foley said. “This was not a fun personal balance-sheet reset.”

Barry McCarthy, a Silicon Valley veteran, became Peloton’s CEO in February.



Photo:

Angela Owens/The Wall Street Journal

In February, Mr. Foley stepped down as Peloton’s CEO and was succeeded by

Barry McCarthy,

a former

Netflix Inc.

and Spotify Technology SA executive. Mr. Foley kept his position as Peloton’s executive chairman and continued to hold a controlling stake in the company through Class B shares with 20 votes apiece.

A few weeks later, Mr. Foley reported selling $50 million worth of Peloton shares in a private transaction. At the time, Peloton said the sale was part of the executive’s personal financial planning. The sale left him and his wife,

Jill Foley,

a former Peloton executive, with 6.6 million shares and options on another 8.4 million, according to securities filings, which combined are currently worth less than $100 million. He hasn’t reported any stock or option sales since March. Business Insider reported in March that Mr. Foley was in discussions with Goldman about restructuring his personal loans.

Peloton’s business deteriorated throughout the spring and summer, with the company in August reporting a $1.2 billion loss and the first ever quarter in which its subscriber numbers failed to grow. The company has cut thousands of jobs this year to stem its losses, including a round of layoffs unveiled last week.

Mr. Foley’s 10-year tenure as CEO was marked by rapid growth and sometimes lavish spending. He took heat from Peloton employees last December for hosting a black-tie holiday party that included some of the company’s celebrity instructors weeks after implementing a hiring freeze. Pictures circulated on Instagram of gown-clad instructors dancing at New York’s luxury Plaza Hotel. Mr. Foley acknowledged on social media that the event caused “frustration and angst” among employees.

Peloton has been on a wild ride, announcing its CEO was stepping down and thousands of jobs would be cut, despite seeing a surge in sales early in the pandemic. Here’s why Peloton became a viral success, and why it’s spinning out now. Photo illustration: Jacob Reynolds

That same month, Mr. Foley paid $55 million to purchase an oceanfront mansion in East Hampton, N.Y., according to real-estate records and people familiar with the transaction. He and Ms. Foley in September put their Manhattan penthouse up for sale. The property, last priced at $6.5 million, is in contract to be sold, according to listings website StreetEasy.

Margin loans, or borrowing against portfolios of stocks and bonds, come with the risk that a broker can call for additional cash or collateral to meet the minimum equity required if a security’s price drops too low. Sharp drops in stock prices during the 2000 dot-com burst and the 2008 financial crisis generated margin calls for executives at well-known companies.

John Foley paid $55 million to purchase this oceanfront mansion in East Hampton, N.Y.



Photo:

PICTOMETRY

Peloton requires directors, executives and employees to get approval for pledging their shares as collateral for margin loans. Other Peloton executives also have pledged some of their Class B holdings, and in the annual report Peloton filed last month, the company warned that investors could be harmed if its stock fell and executives were forced to sell shares.

Goldman has worked closely with Peloton, including when Mr. Foley was the CEO. The investment bank was one of the lead underwriters of the company’s initial public offering in 2019. Goldman bankers also co-led a $1 billion stock offering in November 2021.

Investors initially soured on Peloton—its shares fell 11% the day they made their debut at $29. The stock surged in 2020 during the onset of the Covid-19 pandemic, giving the company a peak market value of $50 billion and making Mr. Foley a billionaire on paper. The shares closed down 3.4% Tuesday at $8.78.

—Theo Francis

and Katherine Clarke contributed to this article.

Write to Sharon Terlep at sharon.terlep@wsj.com and Suzanne Vranica at suzanne.vranica@wsj.com

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Business

Wall Street to Pay $1.8 Billion in Fines Over Traders’ Use of Banned Messaging Apps

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WASHINGTON—Eleven of the world’s largest banks and brokerages will collectively pay $1.8 billion in fines to resolve regulatory investigations over their employees’ use of messaging applications that broke record-keeping rules, regulators said Tuesday.

The fines, which many of the banks had already disclosed to shareholders, underscore the market regulators’ stern approach to civil enforcement. Fines of $200 million, which many of the banks will pay under the agreements, have typically been seen only in fraud cases or investigations that alleged harm to investors.

But the SEC, in particular, has during the Biden administration pushed for fines that are higher than precedents, saying it wants to levy fines that punish wrongdoing and effectively deter future potential harm. The SEC’s focus on record-keeping is likely to be extended next to money managers, who also have a duty to maintain written communications related to investment advice.

Last month, the SEC alleged that hedge-fund manager Deccan Value Investors LP and its chief investment officer failed to maintain messages sent over

Apple

iMessage and WhatsApp. In some cases, the chief investment officer directed an officer of the company to delete their text messages, the SEC said. The claims were included in a broader enforcement action, which Deccan settled without admitting or denying wrongdoing.

The Wall Street Journal reported last month that the settlements announced Tuesday were likely to top $1 billion and would be announced before the end of September.

Eight of the largest entities, including Goldman Sachs and Morgan Stanley, agreed to pay $125 million to the SEC and at least $75 million to the CFTC. Jefferies will pay a total of $80 million to the two market regulators, and

Nomura

NMR -1.20%

agreed to pay $100 million. Cantor agreed to pay $16 million.

The SEC said it found “pervasive off-channel communications.” In some cases, supervisors at the banks were aware of and even encouraged employees to use unauthorized messaging apps instead of communicating over company email or other approved platforms.

“Today’s actions—both in terms of the firms involved and the size of the penalties ordered—underscore the importance of recordkeeping requirements: they’re sacrosanct. If there are allegations of wrongdoing or misconduct, we must be able to examine a firm’s books and records to determine what happened,” said SEC Enforcement Director

Gurbir Grewal.

Bank of America, which faced the highest fine from the CFTC, had a “widespread and long-standing use of unapproved methods to engage in business-related communications,” according to the CFTC’s settlement order. One trader wrote in a 2020 message to a colleague: “We use WhatsApp all the time, but we delete convos regularly,” according to the CFTC.

One head of a trading desk at Bank of America told subordinates to delete messages from their personal devices and to communicate through the encrypted messaging app Signal, the CFTC said. The head of that trading desk resigned this year, although the bank was aware of his conduct in 2021, the CFTC said.

At Nomura, one trader deleted messages on his personal device in 2019 after being told the CFTC wanted them for an investigation, the agency said. The trader made false statements to the CFTC about his compliance with the records request, the regulator said.

Broker-dealers have to follow strict record-keeping rules intended to ensure regulators can access documents for oversight purposes. The firms settling with the SEC and CFTC admitted their employees’ conduct violated those regulations.

JPMorgan Chase

& Co.’s brokerage arm was the first to settle with the two market regulators over its failure to maintain required electronic records. JPMorgan paid $200 million last year and admitted some employees used WhatsApp and other messaging tools to do business, which also broke the bank’s own policies.

Regulators discovered that some JPMorgan communications, which should have been turned over for separate enforcement investigations, weren’t collected because they were sent on employees’ personal devices or apps that the bank didn’t supervise.

Write to Dave Michaels at dave.michaels@wsj.com

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Business

Avaya’s Collapsing Debt Deal Hits Clients of Goldman, JPMorgan

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The two banks sold new loans and bonds for Avaya, a cloud-communications company, in late June. Investors included Brigade Capital Management LP and Symphony Asset Management LLC, people familiar with the matter said.

A few weeks later, Avaya announced that it would miss by more than 60% its previous forecasts for adjusted earnings in the third quarter, which ended June 30. It gave no explanation. The company also said that it would miss revenue targets and announced it was removing its chief executive officer.

Prices of the newly issued debt plummeted, hitting investors who lent Avaya the money with paper losses exceeding $100 million, according to analyst commentary and data from MarketAxess and Advantage Data Inc.

Avaya said Tuesday that it “has determined that there is substantial doubt about the Company’s ability to continue as a going concern.” It also said that the audit committee of the board of directors had opened an internal investigation “to review the circumstances surrounding” the most recent quarter. The committee is also investigating a whistleblower letter, but it didn’t give details.

Avaya also tapped law firm Kirkland & Ellis LLP and turnaround adviser AlixPartners LLP as it considers its options, The Wall Street Journal reported Tuesday.

New CEO

Alan Masarek

held an abbreviated conference call Tuesday to discuss third-quarter earnings and declined to take questions from Wall Street analysts. Mr. Masarek attributed Avaya’s poor performance in part to clients signing up for smaller and shorter software subscription contracts than expected, potentially out of fear about the company’s debt load.

“I understand very clearly that there is disappointment, there’s worry, there’s concern out there across effectively all Avaya stakeholders,” Mr. Masarek said. “I’m going to thank you in advance for your patience… Give us some time to demonstrate a better future.”

Avaya’s 6.125% bond due 2028 fell as low as 48.50 cents on the dollar after the presentation, down from a close of 56.25 cents on Monday, according to data from MarketAxess.

Some analysts were already skeptical of Avaya’s financial forecasts.

“Why [are] your projections always faltering when you report quarterly results? Why can’t you have a stable outlook?” asked

Hamed Khorsand,

an analyst at BWS Financial, after the company’s last quarterly earnings report in May. Avaya undershot that quarter’s adjusted-earnings targets by about 10%.

Avaya’s former CEO Jim Chirico, applauding at the company’s stock listing in 2018, was removed last month.



Photo:

Richard Drew/Associated Press

Then-CEO

Jim Chirico

attributed the fumble to Avaya’s adoption of a new sales strategy that forced the company to recognize revenue more slowly. “We believe we’re over that hurdle,” he said at the time.

Avaya emerged as a telecommunications-equipment supplier to corporations in 2000, when it spun out of Lucent Technologies. Private-equity firms TPG and Silver Lake Partners bought the company in 2007, but it struggled to transition from selling hardware to selling software, and with servicing debt from the buyout. The company filed for bankruptcy protection a decade later before reorganizing. Mr. Chirico took the helm in 2017 and shifted to developing cloud-based software for enterprises.

“Avaya squandered a lot of money and time and has little to show for it,” independent enterprise communications analyst Dave Michels wrote in a recent report. “Many of us have wondered why the board didn’t act sooner—years sooner.”

A spokeswoman for Avaya declined to comment on analysts’ critiques.

The financial crunch hit this spring when Avaya’s cash reserves shrank to $324 million—down from almost $600 million a year earlier, according to company filings. The company tried to raise new debt to refinance a $350 million convertible bond that was coming due in 2023, according to company filings.

Goldman initially proposed a $500 million loan with a 12.6% yield but found few buyers, according to data provider LevFin Insights. The bank ultimately placed a $350 million secured loan yielding 15.5% with investors. Lenders included Symphony, which has invested in Avaya since before its bankruptcy, the people familiar with the matter said.

Avaya approached JPMorgan in late June to raise additional funds, according to one of the people. The bank placed a $250 million secured convertible bond. Investors included Brigade, the people said.

During the marketing process, Avaya executives told lenders that the company was on track to hit its earnings guidance, some of the people familiar with the matter said.

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Should companies return capital raised shortly before large earnings misses? Why or why not? Join the conversation below.

The company had set Ebitda guidance of about $145 million for the quarter ended June 30 but cut that to between $50 million and $55 million on July 28. (Ebitda refers to earnings before interest, taxes, depreciation and amortization.) Avaya reported $54 million of Ebitda for the quarter on Tuesday, a figure that barely covers the quarterly interest expenses it disclosed in recent earnings reports.

“It is a surprising outcome for a company that priced $600 million of fresh capital…just four weeks ago,” said

Lance Vitanza,

a stock analyst at Cowen Inc. “It may be too late to accomplish much without radically restructuring Avaya’s balance sheet.”

The newly issued loans were quoted around 65 cents on the dollar Tuesday, down from 87 cents in late July, according to Advantage Data. The new convertible bond is likely to trade at similar prices in the near future, Mr. Vitanza said.

Losses have been heavier for owners of Avaya stock, which fell to as low as 82 cents last week from around $2.50 in early July and about $10 at the start of May. Avaya shares fell 46% Tuesday to 61 cents.

Alexander Gladstone and Andrew Scurria contributed to this article.

Write to Matt Wirz at matthieu.wirz@wsj.com

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Business

Madcap Markets Push Goldman Sachs To Higher Trading Revenue, but Profit Falls

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Goldman Sachs Group Inc.

GS 2.51%

said Monday that second-quarter earnings fell 47%, capping an earnings season where weak and volatile markets crimped investment banking revenue across the industry but boosted trading.

But what was bad for investment bankers was good for traders. Widespread volatility meant investors placed more trades across a variety of asset classes, and banks took advantage. At Goldman, second-quarter trading revenue rose 32% to $6.5 billion. The other banks also reported big increases in trading revenue.

However, all the major U.S. banks reported double-digit declines in profit, and most of them missed analysts’ expectations. Year-ago results were juiced by reserve releases across the industry, when the banks let go of some of the money they had socked away for pandemic losses.

This year so far has marked a comedown from what had been near-perfect conditions for Wall Street at the height of the pandemic. The stimulus from governments and central bankers in response to Covid led to a swift recovery from a recession and ebullient capital markets. The effects of the pandemic also led to changes in how customers and businesses operate, which sent corporate chieftains on a deal making spree.

The current environment is far less friendly. The highest inflation in decades, sharply higher interest rates, and significant geopolitical concerns have sent markets for a loop, with the S&P 500 recently finishing its worst first half in more than 50 years. That uncertainty has given corporate executives pause about taking their companies public or selling additional stock.

Likewise, the U.S. economy has been flashing disparate signals about its health. The finances of U.S. consumers and businesses remain relatively strong. Executives at Bank of America, which also reported second-quarter results on Monday, said their customers were spending and borrowing at a strong clip.

But higher costs for groceries, gas and rent are hurting many consumers, and U.S. households have started spending some of the savings they accumulated during the pandemic. Bank executives across the industry are concerned about a possible recession, although they haven’t seen clear evidence of one just yet.

Goldman CEO David Solomon noted conflicting signals on the inflation outlook.



Photo:

patrick t. fallon/Agence France-Presse/Getty Images

Goldman CEO

David Solomon

pointed to conflicting signals on the inflation outlook Monday. He said the bank’s corporate clients continue to experience persistent inflation in their own supply chains, but added that the firm’s economists expect inflation to slow in the rest of the year.

Goldman’s second-quarter profit fell to $2.9 billion from $5.5 billion a year ago. Revenue fell 23% to $11.9 billion, though both beat the expectations of analysts polled by FactSet.

Bank of America’s profit fell 32% to $6.2 billion and revenue rose 6% to $22.7 billion.

Goldman shares rose 2.5%. Bank of America shares were roughly flat.

Within the investment banks, stock-selling businesses were hit especially hard. In 2021, companies raced to go public via initial public offerings and blank-check companies known as SPACs. That activity has ground to a halt so far this year.

Goldman is planning to slow its hiring pace in the second half of the year, after staffing up for the pandemic deal making boom. The bank had 47,000 employees at the end of June, up from about 41,000 a year ago. Finance chief

Denis Coleman

also said the bank would bring back annual performance reviews for its workers, a practice Goldman had mostly suspended during the pandemic.

Bank Earnings Center

More coverage and analysis on the latest financial results from Wall Street

Citigroup executives said last week they expected the slowdown to be temporary and wouldn’t change their pace of hiring more investment bankers. “You’re going to see us take a strategic look at this and a long-term look rather than just a shooting from the hip on the expenses side, because we’re building the firm for the long term here,” CEO

Jane Fraser

said.

At Bank of America, where total investment banking revenue fell 46%, Chief Financial Officer

Alastair Borthwick

said investment banking would “rise back to more normal levels in the next few quarters when economic uncertainty becomes more muted.”

Total trading revenue grew 25% at Citigroup, 21% at Morgan Stanley, 15% at JPMorgan and 11% at Bank of America. Goldman’s 32% jump was powered by a big rise in fixed income, currencies and commodities.

JPMorgan generated more trading revenue than any second quarter except during the middle of the pandemic and notched its best-ever second quarter for equities trading.

“Trading markets whipsawed with each release of economic data during the quarter,”

Daniel Pinto,

JPMorgan’s president and the head of the corporate and investment bank, told staff in a memo last week.

—Orla McCaffrey and David Benoit contributed to this article.

Write to Charley Grant at charles.grant@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Business

Morgan Stanley Posts Higher Profit, Capping Mixed Quarter for Big Banks

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A booming market for deals and brisk demand for financial advice lifted

Morgan Stanley’s

MS 1.83%

fourth-quarter earnings and helped the Wall Street firm set a full-year profit record.

The bank posted a profit of $3.7 billion, up 9%, or $2.01 a share. Analysts expected $1.94 a share, according to FactSet. Revenue rose 7% to $14.5 billion in the quarter, which fell just short of expectations.

Morgan Stanley capped off a mixed quarter for the nation’s biggest banks. Windfall trading revenues across Wall Street are slowing down as market volatility subsides. Banks are offering bigger paydays to attract and keep employees in a tight labor market.

Goldman Sachs Group Inc.,

JPMorgan Chase

& Co. and

Citigroup Inc.

all reported lower fourth-quarter profits, ending a streak of big gains. Morgan Stanley,

Bank of America Corp.

and

Wells Fargo

& Co. saw profits rise.

Morgan Stanley shares closed up 1.8% on Wednesday.

Deal making remains a bright spot. Morgan Stanley’s investment banking revenue rose 6% in the fourth quarter. Goldman, JPMorgan and Citigroup also reported gains in investment banking.

The year is off to a good start, with a healthy pipeline for new deals, Morgan Stanley Chief Financial Officer

Sharon Yeshaya

said on a conference call with analysts. “That said, a lot will depend on monetary and fiscal policy and its impact on sentiment,” she added.

Stock and bond trading revenue fell 6% in the fourth quarter. Trading revenue also fell at Goldman, JPMorgan and Citigroup.

Full-year compensation expenses at Morgan Stanley rose 18% to $24.6 billion. Banks increased salaries for junior bankers across Wall Street in 2021, and firms are also paying up to keep senior executives.

“We feel good that we’ve paid for performance,” Ms. Yeshaya said in an interview.

JPMorgan Chief Executive

Jamie Dimon

said last week that his bank would remain competitive in compensating its traders and bankers, even if it pressured profit margins.

Morgan Stanley’s wealth-management division grew fourth-quarter revenue 10% from a year earlier. The unit’s net interest income, a measure of its lending profitability, grew 16%. That growth could continue in the year ahead, as the Federal Reserve has signaled that several interest-rate increases are likely in 2022.

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The number of retail-trading clients at Morgan Stanley was 7.4 million, in line with the third quarter total. The average daily number of retail trades the company handled for the quarter topped one million but was down 6% from a year ago.

Investment management revenue rose 59% from a year earlier. That rate was boosted by Morgan Stanley’s acquisition of Eaton Vance, which closed last March.

Write to Charley Grant at charles.grant@wsj.com

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Business

Get ready for the climb. Here’s what history says about stock-market returns during Fed rate-hike cycles.

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Bond yields are rising again so far in 2022. The U.S. stock market seems vulnerable to a bona fide correction. But what can you really tell from a mere two weeks into a new year? Not much and quite a lot.

One thing feels assured: the days of making easy money are over in the pandemic era. Benchmark interest rates are headed higher and bond yields, which have been anchored at historically low levels, are destined to rise in tandem.

Read: Weekend reads: How to invest amid higher inflation and as interest rates rise

It seemed as if Federal Reserve members couldn’t make that point any clearer this past week, ahead of the traditional media blackout that precedes the central bank’s first policy meeting of the year on Jan. 25-26.

The U.S. consumer-price and producer-price index releases this week have only cemented the market’s expectations of a more aggressive or hawkish monetary policy from the Fed.

The only real question is how many interest-rate increases will the Federal Open Market Committee dole out in 2022. JPMorgan Chase & Co.
JPM,
-6.15%
CEO Jamie Dimon intimated that seven might be the number to beat, with market-based projections pointing to the potential for three increases to the federal funds rate in the coming months.

Check out: Here’s how the Federal Reserve may shrink its $8.77 trillion balance sheet to combat high inflation

Meanwhile, yields for the 10-year Treasury note yielded 1.771% Friday afternoon, which means that yields have climbed by about 26 basis points in the first 10 trading days to start a calendar year, which would be the briskest such rise since 1992, according to Dow Jones Market Data. Back 30 years ago, the 10-year rose 32 basis points to around 7% to start that year.

The 2-year note
TMUBMUSD02Y,
0.960%,
which tends to be more sensitive to the Fed’s interest rate moves, is knocking on the door of 1%, up 24 basis points so far this year, FactSet data show.

But do interest rate increases translate into a weaker stock market?

As it turns out, during so-called rate-hike cycles, which we seem set to enter into as early as March, the market tends to perform strongly, not poorly.

In fact, during a Fed rate-hike cycle the average return for the Dow Jones Industrial Average
DJIA,
-0.56%
is nearly 55%, that of the S&P 500
SPX,
+0.08%
is a gain of 62.9% and the Nasdaq Composite
COMP,
+0.59%
has averaged a positive return of 102.7%, according to Dow Jones, using data going back to 1989 (see attached table). Fed interest rate cuts, perhaps unsurprisingly, also yield strong gains, with the Dow up 23%, the S&P 500 gaining 21% and the Nasdaq rising 32%, on average during a Fed rate hike cycle.

Dow Jones Market Data

Interest rate cuts tend to occur during periods when the economy is weak and rate hikes when the economy is viewed as too hot by some measure, which may account for the disparity in stock market performance during periods when interest-rate reductions occur.

To be sure, it is harder to see the market producing outperformance during a period in which the economy experiences 1970s-style inflation. Right now, it feels unlikely that bullish investors will get a whiff of double-digit returns based on the way stocks are shaping up so far in 2022. The Dow is down 1.2%, the S&P 500 is off 2.2%, while the Nasdaq Composite is down a whopping 4.8% thus far in January.

Read: Worried about a bubble? Why you should overweight U.S. equities this year, according to Goldman

What’s working?

So far this year, winning stock market trades have been in energy, with the S&P 500’s energy sector
SP500.10,
+2.44%

XLE,
+2.35%
looking at a 16.4% advance so far in 2022, while financials
SP500.40,
-1.01%

XLF,
-1.04%
are running a distant second, up 4.4%. The other nine sectors of the S&P 500 are either flat or lower.

Meanwhile, value themes are making a more pronounced comeback, eking out a 0.1% weekly gain last week, as measured by the iShares S&P 500 Value ETF
IVE,
-0.14%,
but month to date the return is 1.2%.

See: These 3 ETFs let you play the hot semiconductor sector, where Nvidia, Micron, AMD and others are growing sales rapidly

What’s not working?

Growth factors are getting hammered thus far as bond yields rise because a rapid rise in yields makes their future cash flows less valuable. Higher interest rates also hinder technology companies’ ability to fund stock buy backs. The popular iShares S&P 500 Growth ETF
IVW,
+0.28%
is down 0.6% on the week and down 5.1% in January so far.

What’s really not working?

Biotech stocks are getting shellacked, with the iShares Biotechnology ETF
IBB,
+0.65%
down 1.1% on the week and 9% on the month so far.

And a popular retail-oriented ETF, the SPDR S&P Retail ETF
XRT,
-2.10%
tumbled 4.1% last week, contributing to a 7.4% decline in the month to date.

And Cathie Wood’s flagship ARK Innovation ETF
ARKK,
+0.33%
finished the week down nearly 5% for a 15.2% decline in the first two weeks of January. Other funds in the complex, including ARK Genomic Revolution ETF
ARKG,
+1.04%
and ARK Fintech Innovation ETF
ARKF,
-0.99%
are similarly woebegone.

And popular meme names also are getting hammered, with GameStop Corp.
GME,
-4.76%
down 17% last week and off over 21% in January, while AMC Entertainment Holdings
AMC,
-0.44%
sank nearly 11% on the week and more than 24% in the month to date.

Gray swan?

MarketWatch’s Bill Watts writes that fears of a Russian invasion of Ukraine are on the rise, and prompting analysts and traders to weigh the potential financial-market shock waves. Here’s what his reporting says about geopolitical risk factors and their longer-term impact on markets.

Week ahead

U.S. markets are closed in observance of the Martin Luther King Jr. holiday on Monday.

Read: Is the stock market open on Monday? Here are the trading hours on Martin Luther King Jr. Day

Notable U.S. corporate earnings

(Dow components in bold)
TUESDAY:

Goldman Sachs Group
GS,
-2.52%,
Truist Financial Corp.
TFC,
+0.96%,
Signature Bank
SBNY,
+0.07%,
PNC Financial
PNC,
-1.33%,
J.B. Hunt Transport Services
JBHT,
-1.04%,
Interactive Brokers Group Inc.
IBKR,
-1.22%

WEDNESDAY:

Morgan Stanley
MS,
-3.58%,
Bank of America
BAC,
-1.74%,
U.S. Bancorp.
USB,
+0.09%,
State Street Corp.
STT,
+0.32%,
UnitedHealth Group Inc.
UNH,
+0.27%,
Procter & Gamble
PG,
+0.96%,
Kinder Morgan
KMI,
+1.82%,
Fastenal Co.
FAST,
-2.55%

THURSDAY:

Netflix
NFLX,
+1.25%,
United Airlines Holdings
UAL,
-2.97%,
American Airlines
AAL,
-4.40%,
Baker Hughes
BKR,
+4.53%,
Discover Financial Services
DFS,
-1.44%,
CSX Corp.
CSX,
-0.82%,
Union Pacific Corp.
UNP,
-0.55%,
The Travelers Cos. Inc. TRV, Intuitive Surgical Inc. ISRG, KeyCorp.
KEY,
+1.16%

FRIDAY:

Schlumberger
SLB,
+4.53%,
Huntington Bancshares Inc.
HBAN,
+1.73%

U.S. economic reports

Tuesday

  • Empire State manufacturing index for January due at 8:30 a.m. ET
  • NAHB home builders index for January at 10 a.m.

Wednesday

  • Building permits and starts for December at 8:30 a.m.
  • Philly Fed Index for January at 8:30 a.m.

Thursday

  • Initial jobless claims for the week ended Jan. 15 (and continuing claims for Jan. 8) at 8:30 a.m.
  • Existing home sales for December at 10 a.m.

Friday

Leading economic indicators for December at 10 a.m.

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