Under pressure, Goldman Sachs CEO abandons consumer finance dream

The pivot in consumer banking has also accelerated discussions for the third major reorganization of Goldman’s business lines in four years. Goldman is again considering combining its asset management and wealth management businesses under a reconfigured leadership team, a move that would further de-emphasize the consumer business. Such moves in previous years proved to be a precursor to defections from the higher ranks.

This description of Goldman’s restructuring of Marcus is based on interviews with executives with knowledge of the plans, who requested anonymity.

A bank spokesman declined to comment. Witherspoon’s representatives did not respond to a request for comment. Her meeting with her did not lead to a deal.

Doubling Marcus’ direct-to-consumer products into wealth is a gamble on what already works for Goldman. The firm has a workplace offering it bought nearly 20 years ago called Ayco. He knows how to court and deal with companies and can reach a targeted workforce at the 500 or so companies he partners with.

Goldman still intends to absorb consumer deposits. The investment bank’s popular savings accounts already hold more than $100 billion ($159.5 billion). Even Marcus’ detractors acknowledge that it was a victory. It is complementary to Goldman’s banking transaction business, which absorbs corporate deposits, another source of cheap funding and a success under Solomon.

Still, the moderation in aspirations marks a downturn for Goldman and Solomon.

His predecessor, Lloyd Blankfein, launched retail banking near the end of a 12-year tenure in which he tried to soften the Wall Street powerhouse’s image among ordinary Americans.

In mid-2018, the executive in charge of courting consumers said Marcus, named for Goldman’s founder, was intended to be the financial services equivalent of a “cuddly teddy bear.” At the time, the platform focused on a simple online savings account that offered an above-average interest rate on deposits, as well as unsecured consumer loans.

Rethink the retail blitz

Later that year Solomon, who also works as a DJ, took over and set the tone. He predicted that digital banking would become one of the company’s key pillars for earnings growth.

“In the coming decades, I expect us to be leaders in our consumer business, just as we are in our institutional and corporate businesses,” Solomon wrote in a memo to staff in 2019, when Goldman launched its first partnership credit card. with apple

The 153-year-old high-finance trader enlisted Bachelorette party TV star JoJo Fletcher to help him reach a whole new audience. Marcus jingles filled the airwaves.

Reese Witherspoon met with David Solomon, but never came to an agreement. invision

Among the largest banks on Wall Street, Goldman has long stood out with its strong focus on serving businesses and other institutions. Rival trading and trading powerhouses JPMorgan and Bank of America, for example, also have branch networks across the country, while Morgan Stanley has gone into wealth management. Under Solomon, Goldman has touted the virtues of becoming a more diversified company.

It is easy to see the attraction to digital banking. Across Silicon Valley, so-called fintech startups were amassing venture capital. Those financing deals were slapping multimillion-dollar valuations on young companies, numbers that seemed to rise with each round. Banks like Goldman, by contrast, were not as enthusiastic among investors. Incubating a fintech within its own walls could help Goldman rise above the rest.

Stocks fall a fifth

Shares of the investment bank got a big boost during the pandemic as its core businesses on Wall Street prospered. But the plans to scale Marcus never produced the kind of valuation surge that the young and reckless companies were achieving. Then this year, fintechs fell from grace as a market-wide rout hit lofty private-company valuations hard.

Goldman shares have plunged more than a fifth in 2022. Solomon has struggled to persuade investors to re-rate the stock, despite preaching the virtues of diversified earnings and shying away from what is perceived as the unpredictability of commerce and banking.

The company’s price-to-book ratio, which compares the bank’s market value to what the company says its parts are worth, has fallen below 1. In other words, shareholders think the company is worth slightly less. than your accountants.

The bank, which for decades has prided itself on the high caliber of its employees, found that offering a checking account is not as simple as it seems. Solomon was one of the main proponents of that product, which would give customers a landing pad for their paychecks and a way to pay bills.

Solomon told colleagues that a conversation with Chris Britt, CEO of neobank Chime, reinforced his belief that massive checking accounts are a must to build a digital bank of the future.

Although Solomon’s team made it a high priority, technical issues proved challenging. By the time the platform was ready, executives were no longer so sure they wanted to pay for a retail blitz. Other large US banks often offer hundreds of dollars in sign-up bonuses to attract new checking account customers.

At Goldman, pressure has mounted on managers to tackle consumer unit spending. It’s gotten even sharper this year, with analysts projecting earnings to fall more than 40 percent from last year’s record, prompting layoffs and bonus cuts.

Midway through the year, the bank internally forecast that the unit’s losses would accelerate to more than $1.2 billion in 2022. That would put cumulative losses on track to exceed $4 billion. Solomon has attributed the drag to the need to reserve for potential bad loans, but the projection also explains the ongoing expense of setting up and running the business.

That doesn’t include the price of acquiring installment loan provider GreenSky in a deal that was initially valued at more than $2.2 billion last year, which turned out to be the peak of the market for fintech companies.

Goldman executives are still confident in the purchase. The draw for them is the ability to attract more merchants to use the service and sell more products to end customers, who tend to have high credit scores.

Shareholders have never been more excited about Marcus. Privately, top executives admit they get a lot of questions about it from confused investors.

So the outcome of Solomon’s meeting with Warren Buffett was a source of amusement for some who had faced pointed questions about his inability to win over investors.

As part of his outreach to major shareholders, the Goldman CEO sought out the Oracle of Omaha and explained how the growth strategy would pay off.

The Berkshire Hathaway boss, known for backing companies that are dominant in their niche, took a stake in Goldman during the financial crisis, an investment that turned out to be very profitable for him.

Unfortunately for Solomon, Buffett was already walking away from the new Goldman, reducing his stake in the company.

In 2020, files show, Buffett zeroed out Berkshire’s stake in Goldman.

Bloomberg Business Week

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