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CNBC Exclusive: CNBC Transcript: Goldman Sachs CEO David Solomon Speaks With CNBC’s Wilfred Frost Today

WHEN: Today, Thursday, October 18, 2018

WHERE: CNBC’s “Closing Bell

Goldman Sachs CEO David Solomon

The following is the unofficial transcript of a CNBC EXCLUSIVE interview with Goldman Sachs CEO David Solomon and CNBC’s Wilfred Frost on CNBC’s “Closing Bell” (M-F 3PM – 5PM) today, Thursday, October 18th. The following is a link to video from the interview on CNBC.com:

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SARA EISEN: WITH THAT LET’S SEND IT OVER TO SANTA BARBARA WHERE WILFRED FROST IS LIVE FROM GOLDMAN SACHS BUILDERS AND INNOVATORS SUMMIT. HE IS JOINED EXCLUSIVELY BY GOLDMAN SACHS CEO DAVID SOLOMON THE FIRST INTERVIEW SINCE TAKING THE HELM. WILFRED TAKE IT AWAY

WILFRED FROST: THANK YOU VERY MUCH FOR THAT. DAVID, THANK YOU FOR HAVING ME HERE

DAVID SOLOMON: ABSOLUTELY. GREAT TO HAVE YOU HERE AGAIN ALWAYS LIKE SEEING YOU OUT HERE. LOVE THIS EVENT. IT IS A TERRIFIC EVENT

FROST: CONGRATULATIONS AS WELL

SOLOMON: THANK YOU

FROST: ON BECOMING CEO AT THE START OF THIS MONTH. IT IS GREAT TO GET A CHANCE TO TALK TO YOU ABOUT THE EVENT AND ABOUT BECOMING CEO AND YOUR VISION AS WE WERE DISCUSSING OFFLINE I WANT TO START WITH MARKET VOLATILITY GIVEN IT IS A BIG SELLING DAY AGAIN TODAY THE NASDAQ DOWN OVER 2%, THE DOW IS DOWN 400 POINTS EARLIER. OF COURSE FOLLOWS A VERY VOLATILE DOWN WEEK LAST WEEK AS WELL WHEN YOU TALK TO YOUR CLIENTS WHAT’S THE BIGGEST REASON THAT THEY ARE SELLING IN YOUR EYES? IS IT THE SPIKE IN RATES THAT YOU HAVE SEEN?

SOLOMON: I THINK YOU HAVE TO PUT MARKET VOLATILITY IN CONTEXT TO SOME DEGREE SO I START BY SAYING AS WE CAME INTO OCTOBER WE HAD SIX MONTHS IN A ROW OF UP MARKETS EACH MONTH. YOU KNOW, I ALSO LOOKED BACK AND I NOITICED IF YOU GO BACK TO THE SPRING OF 2016 ON A MONTH TO MONTH BASIS WE HAD 27 OUT OF THE LAST 31 MONTHS COMING INTO OCTOBER OF UP MARKETS. SO 85, 87% WHEN YOU HAVE A RUN LIKE THAT THERE’S NO QUESTION AT TIMES MARKETS WILL RETRACE A LITTLE BIT. I ALWAYS GO BACK TO THE UNDERLYING ECONOMY. WHAT’S GOING ON IN THE UNDERLYING ECONOMY AND AT THE MOMENT THE UNDERLYING ECONOMY IT IS PRETTY STRONG. FROM TIME TO TIME GIVEN THE GAINS THAT PEOPLE HAVE SEEN IN MARKETS RECENTLY IT’S NOT SURPRISING YOU SEE SOME SELLING AND YOU SEE SOME REBALANCING BUT STILL AT THIS POINT THE UNDERLYING ECONOMY SEEMS LIKE IT IS PRETTY GOOD.

FROST: A LOT OF PEOPLE QUESTION WHETHER THE ECONOMY IS LATE CYCLED DO YOU ANY THAT’S FAIR

SOLOMON: I’M NOT GOOD AT PREDICTING THE LENGTH OF CYCLES THERE’S NO QUESTION GIVEN THIS HAS BEEN A LONG CYCLE WE ARE PROBABLY CLOSER TO THE END THAN WE ARE TO THE BEGINNING. AT THE SAME POINT WITH ECONOMIC ACTIVITY ACTUALLY IN PRETTY GOOD SHAPE I THINK THERE’S A REASONABLE CHANCE IT CAN CONTINUE FOR SOME PERIOD OF TIME THERE ARE A LOT OF THINGS THAT COULD KNOCK IT OFF BUT THERE’S NO QUESTION THAT WE HAVE PRETTY GOOD VISIBILITY ON STRONG CORPORATE EARNINGS HEADING INTO 2019 ALSO SOME CONTINUING TECHNICALS THAT I THINK CAN SUPPORT THE MARKET IF THE UNDERLYING ECONOMY CONTINUES TO BE STRONGER

FROST: I GUESS THE PRESIDENT FEARS ONE OF THE THINGS THAT COULD KNOCK THE ECONOMY OFF THIS PATH IS THE FED AND INTEREST RATES HE SAID I THINK THE FED IS MAKING A MISTAKE THEY’RE SO TIGHT I THINK THE FED HAS GONE CRAZY IS HE RIGHT?

SOLOMON: WELL THE FED HAS BEEN VERY TRANSPARENT AND VERY THOUGHTFUL AND VERY METHODICAL ABOUT THE PROCESS OF STARTING TO UNWIND THIS UNPRECEDENTED MONETARYT POLICY THAT HAS BEEN IN PLACE FOR QUITE SOME TIME. I THINK THEY HAVE DONE A GOOD JOB BEING CLEAR AND TRANSPARENT AND AGAIN, THINGS HAVE TO BE PUT IN PERSPECTIVE WHILE THERE HAS BEEN A MOVEMENT UP IN RATES. I DOTHINK THE INTEREST RATES CAN HAVE AN IMPACT ON THE MARKETS. I WOULD CERRTIANLY NOT CALL RATES HIGH IN ANY WAY RIGHT NOW AND YOU DON’T HAVE TO GO BACK THAT FAR IN HISTORY TO JUST HAVE A DIFFERENT PERSPECTIVE IN FACT I THINK ABOUT MY CAREER I STARTED IN 1984. WHEN I STARTED IN 1984 I THINK THE 10 YEAR TREASURY WAS AROUND 11.5%. THERE ARE DIFFERENT ENVIRONMENTS DIFFERENT THINGS THAT CAN EFFECT RATES OVER TIME I THINK THE FED HAS BEEN PRETTY TRANSPARENT. YOU DON’T WANT TO GET INTO A POSITION WHERE THE FED GETS BEHIND AND SO THE MONETARY POLICY THAT WE ARE TRYING TO UNWIND IS UNPRECEDENTED. I THINK THE FEDS ARE BEING THOUGHTFUL ABOUT THAT. THINK WHERE WE CAN GET INTO TROUBLE IS IF AT SOME POINT IN TIME RATES START GOING UP FASTER THAN EVERYONE EXPECTS AND THE FED GETS BEHIND THAT’S WHAT WE SAW IN 1994.

FROST: WHEN YOU TALK TO COMPANIES AND CORPORATES HOW IS THEIR VIEW ON HOW STRONG THEIR FEELING CHANGED IN THE LAST 12 MONTHS?

SOLOMON: I THINK CORPORATE SENTIMENT IT IS STILL PRETTY STRONG THAT’S BECAUSE GENERALLY SPEAKING, YOU KNOW, CORPORATIONS HAVE A GREAT TENDENCY TO LOOK AT THE ENVIRONMENT THEY ARE IN IN THE MOMENT OR LOOK THROUGH THE REAR-VIEW MIRROR AND SO THERE’S A LOT OF MOMENTUM WITH RESPECT TO CORPORATE EARNINGS. CORPORATIONS NOW THAT TAX REFORM HAS BEEN DONE IT IS GENERATING A LOT OF CASH THEY ARE DEPLOYING THAT CASH IN THE FORM OF INVESTMENT OR M&A ALSO RETURNING IT TO SHAREHOLDERS I THINK CORPORATE SENTIMENT IS STILL PRETTY HIGH

FROST: IF WE COME BACK JUST TO THE EQUITY MARKET QUICKLY I MEAN WE SAW BIG MOVES LAST WEEK, 4% ONE DAY 2% TODAY ON THE NASDAQ ARE THOSE BIG INTRADAY MOVES A CONSEQUENCE OF THE CHANGING NATURE OF EQUITY MARKETS WITH MORE AUTOMATED TRADING MORE ETFs? IS THAT SOMETHING WE SHOULD EXPECT TO CONTINUE THOSE BIG INTRADAY MOVES?

SOLOMON: YOU KNOW, LOOK, I THINK THERE’S NO QUESTION THAT MARKET STRUCTURE CAN AT TIMES CONTRIBUTE TO VOLATILITY I THINK ONE OF THE THINGS WE ARE SPENDING A BUNCH OF TIME THINKING ABOUT AT THE FIRM IS HOW CHANGES IN MARKET STRUCTURE OVER THE COURSE OF THE LAST TEN YEARS WILL EFFECT MARKET ACTIVITY THERE’S NO QUESTION BETWEEN REGULATION WHICH EFFECTED THE WAY LARGE INSTITUTIONS PARTICIPATE IN PROVDING LIQUIDITY. THE GROWTH OF PASSIVE PRODUCT, INDEX PRODUCT ETF GROWTH OF SYSTEMATIC TRADING AND MACHINES MORE INVOLVED IN WHAT WE DO. ALL OF THOSE THINGS ARE UNTESTED OVER ANY DURATION OF TIME WITH SEVERE STRESS. WHEN WE SEE A LITTLE BIT OF STRESS YOU CAN SEE REACTIONS THAT MIGHT LEAD YOU TO BELIEVE THAT THERE IS A RISK THAT MORE SIGNIFICANT STRESS IT COULD PLAY A BIGGER ROLE I WOULDN’T PREDICT THAT. IT IS CERTAINLY SOMETHING WE WATCH. THERE’S NO QUESTION WHEN WE LOOK AT LAST WEEK SOME OF THE SELLING IS THE RESULT OF PROGROMATIC SELLING BECAUSE VOLATILITY GOES UP SOME OF THESE ALGORITHMS FORCE PEOPLE TO SELL

FROST: UH-HUH. BACK TO THE SORT OF BROADER ECONOMY, ONE OF THE RISKS PEOPLE ALWAYS MENTION IS TRADE WITH CHINA. WHEN YOU LOOK AT THE RHETORIC THERE IS IT FAIR TO SAY WE ARE NOW IN A TRADE WAR WITH CHINA

SOLOMON: WELL THE PRESIDENT RECENTLY USED THE WORD TRADE SKIRMISH DON’T KNOW WHETHER IT IS A TRADE SKIRMISH OR TRADE WAR. BUT THERE IS NO QUESTION THAT THAT’S A REAL ISSUE IT HAS THE POTENTIAL TO HAVE A BIGGER IMPACT ON MARKETS I DON’T THINK IT HAS HAD A SIGNIFICANT IMPACT ON MARKETS AT THIS POINT IN TIME BUT I THINK THE MORE INTERESTING QUESTION AROUND THE RELATIONSHIP BETWEEN THE U.S. AND CHINA IS NOT JUST FIGURING OUT WHERE WE ARE ON TRADE BUT FACTUALLY THERE’S AN ENORMOUS IMBALANCE IN THE RELATIONSHIP AND I THINK IT IS SOMETHING THE ADMINISTRATION HAS BEEN RIGHT ON IN TERMS OF HOW THEY ARTICULATED IT, IN TERMS OF CHINA’S OPENNESS AND THE WAY BUSINESS IS INCLUDING A BUSINESS LIKE OURS HOW A BUSINESS LIKE OURS CAN PARTICIPATE AROUND TECHNOLOGY TRANSFER, ALL OF THAT HAS TO BE REBALANCED TRADE IS ONE COMPONENT OF THAT I THINK ONE OF THE MORE INTERESTING THINGS THAT MARKET PARTICIPANTS ARE LOOKING AT AND THINKING ABOUT IS WHERE IS THE LONGER TERM OR THE MORE MEDIUM TERM RELATIONSHIP BETWEEN CHINA AND THE US GOING AS WE TRY TO RESOLVE THIS IT IS ACTUALLY SOMETHING THAT DEMOCRATS AND REPUBLICANS REALLY DO AGREE ON. WE HAVE GOT TO BRING THAT RELATIONSHIP MORE INTO BALANCE TRADE IS ONE ASPECT OF IT.

FROST: WHETHER YOU LIKE THE TACTICS OR NOT IS IT FAIR TO SAY THAT THE PRESIDENT’S TACTICS ARE WORKING AND BY THAT I MEAN IS THE CHINESE ECONOMY HURTING A LOT MORE THAN THE US ECONOMY

SOLOMON: I THINK YOU HAVE TO BE CAREFUL WITH THAT. I THINK THE DIAGNOSIS IS RIGHT WE HAVE AN IMBALANCE WE HAVE TO FIX NOT CLEAR ON THE TACTICS IT THERE’S NO QUESTION AT THE MOMENT CHINA’S ECONOMY HAS BEEN UNDER MORE PRESSURE THAN THE U.S. ECONOMY HAS BEEN I THINK YOU HAVE TO BE CAREFUL ABOUT HOW YOU CARRY THAT THROUGH. I THINK IT’S SOMETHING THAT’S NOT GOING TO GET RESOLVED QUICKLY. WHETHER THE TRADE ISSUE SPECIFICALLY GETS RESOLVED QUICKLY OR NOT THE BROADER ISSUE WITH RESPECT TO HOW CHINA AND UNITED STATES PARTICIPATE ECONOMICALLY AROUND THE GLOBE , THAT’S GOING TO TAKE MORE TIME

FROST: CAN IT DERAIL US GROWTH NEXT YEAR?

SOLOMON: IT COULD CERTAINLY HAVE AN EFFECT ON U.S. GROWTH. I THINK OVER TIME WE WILL TALK A LOT ABOUT THE RELATIONSHIP BETWEEN THE U.S. AND CHINA AND IT WILL HAVE AN IMPACT ON US GROWTH AND GLOBAL GROWTH GIVEN THE SIZE OF BOTH ECONOMIES

FROST: ANOTHER GEOPOLITICAL ISSUE IN THE CROSS HAIRS IS SAUDI ARABIA IF TENSIONS ESCALATE BETWEEN THE US AND ITS ALLIES AND SAUDI ARABIA MORE MEANINGFULLY IS THAT SOMETHING THAT COULD DAMAGE GROWTH AND DAMAGE MARKETS?

SOLOMON: THERE’S NO QUESTION MARKETS REALLY RESPOND TO CONFIDENCE AND SENTIMENT YOU ASKED ME ABOUT CEO CONFIDENCE I GAVE YOU AN ANSWER THAT WAS PARTICULARLY TIED TO WHAT CEOs ARE SEEING IN THE BUSINESS IF GEOPOLITICS BECOMES MORE VOLATILE OR ISSUES LIKE THAT CAN AFFECT SENTIMENT, YES, IT COULD EFFECT MARKETS AND TRANSLATE INTO GROWTH FOR SURE

FROST: AS AN ASIDE ON THAT TOPIC SECRETARY MNUCHIN SAID HE WOULDN’T BE GOING TO THE SAUDI INVESTMENT CONFERENCE IS ANYONE FROM GOLDMAN SACHS GOING?

SOLOMON: WE HAD NO PLANS TO GO. I WAS NOT PLANNING TO GO AND WE HAD NO SENIOR EXECUTIVES PLANNING TO GO CONFERENCE. WE HAD NOT PLANNED THAT. DENA POWELL HAS BEEN PLANNING TO GO TO THE CONFERENCE AND SHE WILL NOT BE ATTENDING THE CONFERENCE.

FROST: HOW DO YOU THINK ABOUT THAT WHEN IT IS A MORAL ISSUE AN UNPROVEN MORAL ISSUE TO BALANCE THE SORT OF INTERESTS OF MAKING MONEY FOR YOUR SHAREHOLDERS OF GOLDMAN SACHS VERSES A PERFECT MORAL COMPASS ALWAYS BECAUSE CLEARLY DOING BUSINESS WITH EVEN WITH A COUNTRY LIKE CHINA YOU COULD FIND ISSUES TO POINT TO.

SOLOMON: LOOK, THEY ARE ALL COMPLICATED ISSUES WE THING ABOUT THOSE THINGS AND BALANCE THEM ALL OF THE TIME. BUT I WOULD SAY WITH RESPECT TO SAUDI ARABIA OVER THE LAST COUPLE OF YEARS WE HAVE LISTENED AS THEY HAVE TALKED ABOUT THEIR VISION TO PARTICIPATE MORE BROADLY IN THE GLOBAL ECONOMY AND DIVERSIFY ECONOMICALLY AND ALSO TO REMAKE OR REMODEL THEIR SOCIETY. WE RECENTLY WATCHED THAT TO THE DEGREE THAT THEY COULD DELIVER ON THAT IT COULD BE GOOD FOR SAUDI ARABIA AND GOOD FOR THE WORLD. THIS INCIDENT IS UNACCEPTABLE AND CLEARLY THEY HAVE TO ANSWER QUESTIONS SPECIFICALLY REGARDING THIS INCIDENT AND HOW THEY ANSWER QUESTIONS AND HOW MORE INFORMATION BECOMES APPARENT AROUND ALL OF THIS WILL HAVE AN IMPACT ON HOW WE ALL INTERACT IT IS SOMETHING WE’LL CONTINUE TO WATCH CLOSELY

FROST: WANT TO SWITCH FOCUS TO THE FACT THAT YOU’RE THE NEW CEO OF GOLDMAN SACHS. SORRY IT HAS TAKEN SO LONG TO GET TO THAT TOPIC.

SOLOMON: THAT’S OKAY WE WERE DOING OK ON THE OTHER TOPICS TOO

FROST: YOU WERE HEAD OF THE INVESTMENT BANK PREVIOUSLY AND IN THAT ROLE YOU DEALT WITH A LOT OF CEOs. WERE THERE ANY THAT REALLY STOOD OUT TO YOU THAT YOU WOULD SORT OF LIKE TO EMULATE YOURSELF NOW THAT YOU ARE A FULL CEO

SOLOMON: SO I HAVE BEEN VERY FORTUNATE IN MY CAREER I THINK IT IS ONE OF THE EXCITING THINGS ABOUT WORKING IN INVESTMENT BANKING. YOU MEET WORK WITH COUNSEL WATCH A NUMBER OF CEOS THEY REALLY HAVE A BIG LEADERSHIP IMPACT ON THEIR ORGANIZATIONS. AS I TRANSITION IF YOU ASK ME I GUESS TWO PEOPLE COME TO MIND AT THE MOMENT THAT I WOULD HIGHLIGHT AND CERTAINLY I HAVE LOOKED AT AND THOUGHT ABOUT AS I MAKE MY TRANSITION. ONE IS TIM COOK WHICH WAS FOLLOWING, YOU KNOW, THIS INCREDIBLY ICONIC LEADER HARD HARD ACT TO FOLLOW. YOU KNOW, I THINK HE HAS DONE A VERY GOOD JOB IN MAKING THAT TRANSITION HE LEADS APPLE WITH REAL SIMPLICITY AND CLARITY AROUND WHAT THEY ARE TRYING TO DO AND ALSO IN A HUMAN WAY AND I THINK THAT IS VERY IMPORTANT. I ALSO POINT TO SATYA NADELLA HIS TRANSITION AT MICROSOFT ANOTHER COMPANY WITH BIG HISTORY. YOU KNOW, BIG CULTURE BUT A COMPANY THAT NEEDED TO TRANSITION OR EVOLVE A LITTLE BIT. HE WAS VERY VERY SUCCESSFUL IN GOING IN AN EVOLUTIONARY WAY REALLY TRANSITIONING THE BUSINESS IN A VERY POSITIVE WAY SHAREHOLDERS HAVE REALLY BENEFITED FROM AND I WOULD ALSO SAY HE LEADS IN A HUMAN AND HUMBLE WAY SO WHEN I THINK ABOUT GOLDMAN SACHS WE ARE BLESSED WITH INCREDIBLE CLIENT FRANCHISE AND WE ARE BLESSED WITH INCREDIBLE PEOPLE WE STILL, LIKE ALL BUSINESSES, HAVE TO CHANGE AND EVOLVE. SO EVOLUTION WILL BE VERY IMPORTANT PART OF MY LEADERSHIP AND THE FIRM . HOW DO WE TAKE ADVANTAGE OF THE GREAT FRANCHISE THAT WE HAVE AND ALSO EVOLVE THE BUSINESS IN A CHANGING WORLD

FROST: INTERESTING THAT YOU NAMED TWO TECH CEOS THERE, AND WE’LL COME TO THAT PERHAPS IN A LITTLE MOMENT. I WANT TO FOLLOW UP ON THE HUMAN POINT YOU MADE – WHAT CHARACTER TRAITS YOU SAW IN BOTH OF THOSE TWO LEADERS. DOES GOLDMAN SACHS NEED TO BE A BIT MORE HUMAN – PERHAPS A LITTLE LESS ELITE IT MIGHT HAVE HAD THE IMAGE OF IN THE PAST?

SOLOMON: I THINK FOR LEADERS TO BE SUCCESSFUL IN THE WORLD THEY ARE IN TODAY AND ESPECIALLY TO LEAD THE WORKFORCE, I THINK YOU HAVE TO BE APPROACHABLE, I THINK YOU HAVE TO BE HUMAN, I THINK YOU HAVE TO BE VULNERABLE. THAT’S SOMETHING I’VE TALKED A LITTLE BIT ABOUT. WE’VE GOT A WORKFORCE THAT IS A YOUNG WORKFORCE. WE HAVE NEARLY 40,000 PEOPLE AT GOLDMAN SACHS. APPROXIMATELY 60% OF THEM ARE 30 YEARS OLD OR LESS.

FROST: 6-0 PERCENT.

SOLOMON: 6-0 PERCENT, YEAH. AND I THINK THAT, YOU KNOW, GENERATIONALLY PEOPLE WANT TO UNDERSTAND THEIR LEADERS NOT JUST AS A LEADER OF THEIR COMPANY, BUT WHAT THEY STAND FOR MORE BROADLY AS PEOPLE. AND I THINK THAT’S IMPORTANT. I THINK YOU’RE SEEING A LOT OF GREAT CEOs ACROSS A RANGE OF INDUSTRIES REALLY TRYING TO THINK ABOUT THAT. YOU KNOW, WHAT’S THE RIGHT WAY TO JUST BE A LITTLE BIT OPEN ABOUT WHO YOU ARE AS A PERSON. YOU’VE GOT TO BE VERY FOCUSED, VERY COMMITTED TO THE BUSINESS, BUT YOU’VE ALSO GOT TO BE A HUMAN BEING TO LEAD PEOPLE. I THINK THAT IS VERY IMPORTANT.

FROST: ONTO SOME BIG STRATEGY QUESTIONS, DAVID. ONE OF THE BIG MOVES WE HAVE SEEN GOLDMAN SACHS DO IN THE LAST COUPLE OF YEARS IS TO USE THE BALANCE SHEET MORE TO LEND MORE. IS THAT SOMETHING THAT WAS LLOYD’S INITIATIVE OR WAS IT DRIVEN BY YOU AS WELL AND ARE YOU AS COMMITTED TO IT?

SOLOMON: WELL, IT WAS CERTAINLY LLOYD’S INITIATIVE AND I’M COMMITTED TO IT, TOO. YOU KNOW, THE FIRM HAD AN INSTITUTIONAL INVESTMENT BANKING MODEL AND COMING OUT OF THE FINANCIAL CRISIS, WE BECAME A BANK. AND IN THE CONTEXT OF THAT, THERE WAS GOOD AND BAD THAT CAME WITH THAT. BUT CERTAINLY WHEN YOU LOOK AT OUR PLATFORM ONE OF THE AREAS WE WERE WAY UNDERWEIGHT VIS A VIS PEOPLE WERE METRICK AGAINST OR WE COMPETE WITH, WAS LENDING TO OUR CLIENTS. AND SO ONE OF THE THINGS WE HAVE BEEN VERY FOCUSED ON IS, YOU KNOW, LOOKING AT CLIENTS OF THE FIRM AND SAYING WHAT DO THEY NEED FROM US THAT TRADITIONALLY THEY HAVEN’T HAD. AND LENDING IS CERTAINLY AN AREA WHERE WE SAW AN OPPORTUNITY TO GO TO OUR CLIENTS AND OFFER THEM SOMETHING THAT WAS IMPORTANT TO THEM. AND SO, WE HAVE BEEN GROWING THOSE LENDING BUSINESSES MEANINGFULLY. AND IT IS NOT JUST LENDING BUSINESSES AND DEBT BUSINESSES IN GENERAL. YOU THINK ABOUT WHAT WE HAVE DONE IN OUR INVESTMENT BANKING BUSINESS OVER THE DECADE WE WERE A SMALL PLAYER IN DEBT BUSINESSES AND WE’VE INVESTED SIGNIFICANTLY AND BECOME A VERY, VERY MEANINGFUL PLAYER IN THE DEBT UNDERWRITING BUSINESS FOR EXAMPLE AS WE HAVE ROUNDED OUT WHAT WE HAVE BEEN ABLE TO OFFER CORPORATIONS.

FROST: AND WHAT ABOUT, SPECIFICALLY, ON MARCUS? THE CONSUMER SIDE OF THE LENDING. ARE YOU COMMITTED TO GROWING BOTH THE DEPOSIT GROWTH AND THE LENDING SIDE OF THAT AS HARD AS –

SOLOMON: ABSOLUTELY YES. VERY, VERY COMMITTED TO IT. WE SEE A GREAT OPPORTUNITY WITH TECHNOLOGY TO BUILD A DIGITAL PLATFORM TO PROVIDE SOME VERY DIFFERENTIATED SERVICES TO CONSUMERS. WE HAVE THE GREAT ADVANTAGE OF NOT HAVING LEGACY INFRASTRUCTURE, NOT HAVING BEEN IN THESE BUSINESSES, BUT ALSO HAVING A BALANCE SHEET FUNDING AND RISK MANAGEMENT EXPERTISE, WHICH I THINK IS VERY, VERY IMPORTANT IN THOSE BUSINESSES. AND WE ARE EXCITED ABOUT THE PLATFORMS WE ARE ACCUMULATING AND WE ARE REALLY IN A POSITION WHERE WE THINK WE HAVE AN OPPORTUNITY TO BUILD SOME VERY DIFFERENTIATED PRODUCTS. AND WE ARE VERY COMMITTED TO IT. YOU KNOW, THE UK – I THINK YOU KNOW WE ROLLED OUT MARCUS IN THE UK –

FROST: I THOUGHT YOU SAID I THINK YOU KNOW THE UK. I DO KNOW THE COUNTRY, YEAH.

SOLOMON: YOU DO KNOW THE UK. AND MARCUS IN THE UK WAS RECENTLY ROLLED OUT. AND THERE, THERE HAS BEEN A DISCUSSION ABOUT WHETHER OR NOT SAVERS ARE GETTING REALLY INTERESTING BENEFITS AND PRODUCTS THAT ARE APPROPRIATE. AND OVER THE LAST THREE WEEKS, WE HAVE BEEN OVERWHELMED WITH THE INTEREST IN OUR PLATFORM IN THE UK BECAUSE IT IS DIFFERENTIATED IN A VERY POSITIVE WAY. I THINK THERE ARE OPPORTUNITIES  FOR US. WE ARE GOING TO BE SLOW, WE ARE GOING TO BE VERY FOCUSED ON RISK MANAGEMENT. BUT I THINK GOLDMAN SACHS CAN SERVE CONSUMERS IN A DIFFERENTIATED WAY OFF A DIGITAL PLATFORM AND WE ARE QUITE EXCITED ABOUT IT.

FROST: AND WHERE DOES THIS GO IN FIVE YEARS TIME? IS GOLDMAN SACHS IN A FULL MONEY CENTER BANK? WHAT PORTION OF YOUR BALANCE SHEET DO YOU WANT TO BE FUNDED BY CONSUMER DEPOSITS?

SOLOMON: WELL, I THINK THE WAY TO THINK ABOUT IT IS WE ARE GOING TO  CONTINUE TO GROW OUR DEPOSIT BUSINESS, OUR DEPOSIT PLATFORM, BECAUSE THAT IS AN IMPORTANT DIVERSIFICATION OF FUNDING FOR US. SO WE ARE VERY, VERY COMMITTED TO CONTINUING TO DIVERSIFY OUR FUNDING THAT WAY. BUT WE WANT TO BUILD A DIGITAL STOREFRONT. WE HAVE AN ABILITY TO BRING A VARIETY OF PRODUCTS AND SERVICES TO CUSTOMERS COMPLETELY DIGITAL.THAT’S WHERE THE WORLD IS GOING. I THINK, AS I SAID, WE HAVE THE ADVANTAGE OF BEING ABLE TO BUILD IT FROM SCRATCH. AND SO I THINK WHAT YOU WOULD SEE OVER THE NEXT FIVE YEARS IS THESE BUSINESSES WILL GROW, THEY WILL BECOME MORE MEANINGFUL TO GOLDMAN SACHS, AND WE’LL OFFER A RANGE OF DIGITAL PRODUCTS AND SERVICES TO OUR  INDIVIDUAL CUSTOMERS.

FROST: I GUESS THE QUESTION GIVEN THE COMMITMENT TO THAT NEWS IS A LOT OF PEOPLE MIGHT ASK IS WHETHER OR NOT A MOVE IN THAT DIRECTION COULD HAVE BEEN MADE EARLIER. IN PARTICULAR, IN A SINGLE SHOT WITH SOME M&A. IS THAT A REGRET DO YOU THINK THAT THE BOARD HAS WHEN YOU CONSIDER SOME OF WHAT MORGAN STANLEY DID OR BLACKROCK, OTHERS AROUND THE FINANCIAL CRISIS – WHETHER THERE SHOULD HAVE BEEN A PURCHASE OF THAT ILK?

SOLOMON: NO. I THINK WE FEEL VERY GOOD ABOUT THE FACT THAT WE ARE BUILDING A PLATFORM, YOU KNOW, FROM SCRATCH IN AN INTEGRATED WAY. AND I ACTUALLY THINK IT IS ONE OF OUR ADVANTAGES. AND THAT DOESN’T MEAN THERE MIGHT NOT BE AN OPPORTUNITY AT SOME POINT IN THE FUTURE TO THINK ABOUT SOMETHING INORGANIC. BUT I THINK WE ARE BUILDING ADVANTAGE INTO OUR LONG-TERM COMPETITIVE POSITIONING BY BUILDING THIS FROM SCRATCH. YOU HAVE TO SEE IT THROUGH OUR EYES. I GO BACK AND I THINK ABOUT THE  FACT THAT WE STARTED BUILDING AN ASSET MANAGEMENT BUSINESS IN THE MID 1980S WITH THE GOAL OF WAKING UP 30 YEARS LATER AND HAVING A VERY, VERY SIGNIFICANT PLATFORM. WE ARE NOT TRYING TO BUILD THIS FOR THE NEXT FIVE YEARS. WE ARE TRYING TO BUILD THIS FOR THE NEXT THREE DECADES. AND WE ARE GOING TO DO IT RIGHT, MAKE SURE WE GET IT RIGHT AND BE VERY THOUGHTFUL ABOUT IT.

FROST: ANOTHER BIG AREA OF STRATEGY I WANT TO TOUCH ON IS WHAT YOU ARE THINKING ABOUT FOR TRADING. IN 2010, IT WAS 55% OF YOUR REVENUES. LAST YEAR IT WAS 37%. AND IN ABSOLUTE TERMS, THE REVENUES HALFED FROM 22 BILLION TO 11, OR 11.8 BILLION. WHAT WAS THE BIG ERROR THAT WAS MADE IN THE TRADING DEPARTMENT?

SOLOMON: WELL, I DON’T THINK THERE IS A BIG ERROR THAT WAS MADE IN THE TRADING DEPARTMENT. WE STILL HAVE, IF YOU LOOK AT OUR TRADING BUSINESSES, WE HAVE WORLD CLASS TRADING FRANCHISES. IN OUR FIC BUSINESS WE, LIKE EVERYONE ELSE, HAVE HAD TO DEAL WITH THE FACT THAT THE OVERALL WALLET AVAILABLE FOR –

FROST: BUT YOUR MARKET SHARE HAS FALLEN SIGNIFICANTLY FROM 2010 TO TODAY AT A TIME WHEN THE OTHER U.S. INVESTMENT BANKS’ MARKET SHARE HAS GROWN.

SOLOMON: THERE WERE FUNDAMENTAL STRUCTURAL CHANGES INCLUDING REGULATION THAT TOOK CERTAIN PARTS OF THE BUSINESS AWAY AND SO THE OVERALL WALLET HAS SHRUNK VERY SIGNIFICANTLY. WE HAVE BEEN GROWING OUR MARKET  SHARE. AND IT IS IMPORTANT TO NOTE THAT WHEN YOU LOOK AT INSTITUTIONAL CLIENTS, WE HAVE THE NUMBER TWO MARKET SHARE POSITION WITH THE TOP 1,300 INSTITUTIONAL CLIENTS IN FIC. AND OUR MARKET SHARE ACTUALLY IN THE LAST 12 MONTHS HAVE BEEN GROWING. WE HAVE FANTASTIC PEOPLE IN THAT BUSINESS. THEY DO A VERY VERY GOOD JOB. WE HAVE TO, GOING FORWARD, ARTICULATE WHAT THIS BUSINESS, WHERE THIS BUSINESS IS GOING TO GO FROM HERE. NOT LOOK BACK TO TEN YEARS AGO AND TALK ABOUT WHAT IT WAS BEFORE THE FINANCIAL CRISIS BEFORE THE REMAKE. BUT WE HAVE THE NUMBER TWO FRANCHISE IN TERMS OF MARKET SHARE WITH INSTITUTIONAL CLIENTS AND WE THINK WE CAN GROW FROM THERE. I LOOK AT THE FIC BUSINESS, IT’S A GREAT BUSINESS BUT I ALSO THINK THERE ARE OPPORTUNITIES JUST AS THERE WERE IN OUR BANKING BUSINESS 10 YEARS AGO TO ADD CERTAIN PRODUCTS, SERVICES AND FOOTPRINT. SO I WAS TALKING TO YOU BEFORE ABOUT DEBT UNDERWRITING AND HOW WE WERE UNDERWEIGHTED IN THAT BUSINESS AND WE FOCUSED ON REALLY ADDING TO THAT. WHEN I LOOK AT OUR FIC BUSINESS WE ARE DEFINITELY UNDERWAY TO COMPARE TO BANKS THAT WE COMPETE WITH WITH CORPORATES. WE HAVE GREAT CORPORATE  RELATIONSHIPS AND WE ARE VERY FOCUSED ON THAT. SO THERE ARE AREAS WHERE WE CAN DO  BETTER, BUT IT’S A GOOD BUSINESS AND WE ARE  GOINGTO CONTINUE TO MAKE IT BETTER FROM HERE.

FROST: CAN YOU LEVERAGE YOUR PERSONAL RELATIONSHIPS YOU HAD FROM YOUR INVESTMENT BANKING DAYS TO DELIVER ACROSS OTHER PARTS OF THE BUSINESS NOW, LIKE TRADING?

SOLOMON: I THINK WITH CORPORATES IN OUR TRADING BUSINESSES WITH MORE FOCUS ON THAT CLIENTELE AND A BROADER PRODUCT OFFERING THERE’S OPPORTUNITY FOR US. ONE OF THE THINGS THAT’S INTERESTING ABOUT GOLDMAN SACHS IS IF YOU LOOK AT BIG FINANCIAL INSTITUTIONS AND THE PRODUCTS AND SERVICES THEY OFFER CORPORATES, WE HAVE A NARROWER RANGE OF PRODUCTS AND SERVICES WE OFFER TO CORPORATES EVEN THOUGH WE HAVE GREAT RELATIONSHIPS WITH CORPORATES BROADLY. SO I DO THINK THERE’S AN OPPORTUNITY THERE FOR US TO LEVER OUR BROAD CORPORATE RELATIONSHIPS AND ESPECIALLY WITH TECHNOLOGY BRING A BROADER ARRAY OF PRODUCTS AND SERVICES THAT ARE ADDITIVE TO THOSE CLIENTS. AND WE ARE VERY FOCUSED ON THAT.

FROST: I WANT TO TOUCH ON REGULATION. AND TO WHAT EXTENT ARE YOU FEARFUL THAT IT’S VERY INTERTWINED WITH POLITICS AND THAT MIDTERMS COULD THEREFORE COULD SPARK A CHANGE IN DIRECTION IN THE REGULATORY ENVIRONMENT THAT YOU HAVE SEEN FOR THE LAST 18 MONTHS, TWO YEARS?

SOLOMON: SURE. I MEAN, I DO THINK POLITICS CAN PLAY A ROLL IN REGULATION. I ALWAYS THINK ABOUT REGULATION AND HOW IT EFFECTS A BUSINESS LIKE OURS IN THREE BUCKETS. THERE’S THE TONE OF HOW THE REGULATORS ARE INTERACTING WITH INSTITUTIONS LIKE OURS, THERE’S THE RULE MAKING SET AND THERE’S LEGISLATION. OVER THE COURSE OF THE LAST 18  MONTHS TO TWO YEARS THE TONE HAS IMPROVED SIGNIFICANTLY THERE’S SOME DISCUSSION OF APPROPRIATELY ADJUSTING RULES WHERE THE ONSLAUGHT OF REGULATION IS COMING OUT OF THE FINANCIAL CRISIS HOW IT EFFECTS THAT I THINK NOW PEOPLE CAN LOOK BACK AFTER EIGHT OR NINE YEARS, TEN YEARS, AND SAY WE WOULD LIKE TO ADJUST THIS BECAUSE IT WOULD BE BETTER FOR THE SYSTEM. BUT THERE’S BEEN VERY VERY LITTLE  LEGISLATIVE ACTION. IF YOU DID HAVE SOME SORT OF A SHIFT, I DO THINK THE TONE CAN ADJUST A  LITTLE BIT. THAT CAN AFFECT IT TO SOME DEGREE. BUT I DON’T EXPECT ANYTHING THAT HAPPENS IN THE MIDTERM ELECTIONS TO HAVE A SIGNIFICANT IMPACT IN THE SHORT TERM ON THE  REGULATORY ENVIRONMENT. BUT OVER TIME YOU HAVE TO WATCH THAT.

FROST: IN TERMS OF OTHER RISKS OUT THERE, YOU MENTIONED AT A CONFERENCE EVEN HIGHER THAN FACTORS LIKE CHINA AND TRADE THAT WE MENTIONED WITH CYBER SECURITY. DO YOU THINK THAT THE U.S. BANKING SYSTEM WILL BE HACKED – A SIGNFICANT HACK – AT SOME POINT IN THE NEXT DECADE?

SOLOMON: I THINK THAT – I HIGHLIGHTED CYBER BECAUSE I DO THINK THAT MORE SIGNIFICANT CYBER ATTACKS ARE A RISK THAT  COULD HAVE A REAL IMPACT ON CONFIDENCE AND HAVE SECOND AND THIRD DERIVATIVE EFFECTS. THE PLACES THAT YOU’D LOOK THAT ARE MOST OBVIOUS ARE THE FINANCIAL SYSTEM, TRANSPORTATION SYSTEM, POWER GRID, BIG INFRASTRUCTURE AND THINGS LIKE THAT. I’M NOT GOING TO PREDICT THERE WILL BE A SIGNIFICANT HACK INTO THE FINANCIAL SYSTEM. BUT WHEN I THINK ABOUT THINGS THAT COULD HAVE SECOND AND THIRD DERIVATIVE IMPACTS THAT COULD CHANGE CONFIDENCE AND EFFECT GROWTH IN THE ECONOMY OR MARKETS, A MORE SIGNIFICANT CYBER ATTACK THAN SOMETHING WE HAVE SEEN IS A RISK. NOW, ARE GOVERNMENTS WORKING VERY, VERY HARD AT PROTECTING AGAINST THAT? INDUSTRY LEADERES AND BIG BUSINESSES AND OUR INDUSTRY AND IN OTHERS THAT WOULD BE EFFECTED ARE SPENDING A LOT OF TIME THINKING  ABOUT THAT BUT YOU CAN’T SAY IT’S NOT A RISK YOU NEED TO THINK ABOUT AND TRY TO THINK ABOUT AND ANTICIPATE WHAT SOME OF THE SECOND AND THIRD DERIVATIVE EFFECTS WOULD BE.

FROST: TO COME BACK TO THE MARKETS ONE OF THE THINGS YOU DID SAY WAS A RISK THREAT TO LEVELS WAS IF RATES GO UP TOO FAST THAT SAY, FROM WHERE THE 10-YEAR IS AT THE MOMENT, 3.2. BUT WHAT KIND OF LEVEL WOULD BE TOO FAST WHERE IT WOULD WARRANT A BIG PULL BACK IN EQUITY MARKETS.

SOLOMON: YEAH SO I THINK THE LENS THAT I LOOK AT IT THROUGH AND I ACTUALLY READ – WE HAVE SOME RESEARCH THAT HAS BEEN OUT ON THIS – IT’S NOT THE ABSOLUTE LEVEL, IT’S THE SPEED OF CHANGE VERY QUICKLY. SO IF YOU GET A 50 BASIS POINT MOVE IN RATES VERY QUICKLY, THAT’S THE KIND OF THING THAT HAS A GREATER CHANCE IF YOU GO BACK AND LOOK AT HISTORY AND LOOK AT OTHER TIGHTENING CYCLES, THAT IS THE KIND OF THING THAT EFFECTS MARKETS MORE THAN AN ABSOLUTE LEVEL. SO, I THINK THE EQUITY MARKETS CAN WITHSTAND A SLOW, THOUGHTFUL, TRANSPARENT, GRADUAL NORMALIZATION OF INTEREST RATES. WHERE I THINK YOU RUN INTO BIGGER PROBLEMS IS IF SUDDENLY MARKET PERSPECTIVES SHIFTS, RATES GO UP 50 TO 75 BASIS POINTS VERY QUICKLY. THAT WILL HAVE A BIGGER  IMPACT ON CONFIDENCE THAN JUST SOME ABSOLUTE LEVEL.

FROST: AND TO ROUND THINGS OFF, DAVID, IN FIVE TO TEN YEARS’ TIME, WHAT DO YOU THINK WILL BE THE BENCH MARK THAT YOU WOULD LIKE TO MEASURE YOUR PERFORMANCE BY? IS IT AS SIMPLE AS SHARE PRICE, ROES, OR NUMBER OF INSTAGRAM FOLLOWERS GIVEN THAT YOU GUYS HAVE A BIG ACCOUNT NOW?

SOLOMON: LOOK, OUR JOB IS TOTAL SHAREHOLDER RETURN FOR OUR SHAREHOLDERS. WE ARE FOCUSED ON DRIVING SHAREHOLDER RETURN OVER TIME. WHEN YOU LOOK BACK, IF WE ARE SUCCESSFUL, WE WILL HAVE DONE A GOOD JOB AT DELIVERING FOR OUR SHAREHOLDERS ON THAT BASIS.

FROST: DAVID, IT HAS BEEN A PLEASURE. THANK YOU.