David Solomon, chief executive of Goldman Sachs, jumped on a flight to go meet Reese Witherspoon.
The Legally Blonde star-turned-mogul was toying with offering online financial services to her legions of fans, and the head of Wall Street’s most prestigious investment bank wanted in. He saw it as a potential new source of business for Marcus, his firm’s foray onto Main Street and handling money for the masses.
David Solomon was set on building a full-service digital bank. Bloomberg
In the effort to turn Goldman Sachs into a bank for the everyman, that moment in 2019 may have been peak Marcus.
Solomon, 60, who’s spent much of his four years atop Goldman pitching shareholders and his own executives on the benefits of building a full-service digital bank, is now reeling in those aspirations and the resources dedicated to the project.
Cost overruns and missed profitability goals have set off a rising tide of discontent inside the investment bank, concerned questions from regulators and most worryingly, the dismay of shareholders. Now, the bank is restructuring and reorienting those operations.
Rather than catering to just about anyone, Goldman will sling some of its key consumer products through its wealth-management business, augmenting what is already one of the bank’s strengths.
Chequing accounts, once widely expected to get a big rollout to the masses, will instead be steered toward well-to-do clients and employees at corporate partners. The same goes for the bank’s robo-adviser, known as Marcus Invest, and savings accounts.
Consumer lending is being reined in. While the bank will keep credit-card partnerships, it will be very selective about adding to the list.
The pivot in consumer banking has also accelerated discussions for Solomon’s third big reorganisation 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-emphasise the consumer business. Such moves in previous years proved to be a precursor for defections from the top 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 didn’t respond to a request for comment. The meeting with her didn’t lead to a deal.
Folding Marcus’s direct-to-consumer products into wealth is a bet on what already works for Goldman. The firm has a workplace offering that it purchased almost 20 years ago called Ayco. It knows how to woo and deal with companies and can reach a targeted workforce at the roughly 500 companies it partners with.
Goldman still intends to soak up consumer deposits. The investment bank’s popular savings accounts already hold more than $US100 billion ($159.5 billion). Even detractors of Marcus acknowledge that’s been a win. It is complementary to Goldman’s transaction-banking business, which sops up corporate deposits, another source of cheap funding and a success under Solomon.
Still, the tempering of aspirations mark a climbdown 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 with everyday Americans.
In mid-2018, the executive in charge of wooing consumers said Marcus – named for Goldman’s founder – aimed to be the financial-services equivalent of a “lovable teddy bear.” At the time, the platform was centred around a simple online savings account that offered a higher-than-average interest rate on deposits, as well as unsecured consumer loans.
Later that year, Solomon, who moonlights as a DJ, took over and dialled up the pitch. He predicted the digital bank would become one of the firm’s key pillars for earnings growth.
“In the decades to come, I expect us to be a leader in our consumer business, just like we are in our institutional and corporate businesses,” Solomon wrote in a memo to staff in 2019, when Goldman launched its first credit card in partnership with Apple.
The 153-year-old merchant of high finance enlisted Bachelorette TV star JoJo Fletcher to help it reach out to a whole new crowd. Marcus jingles swarmed the airwaves.
Reese Witherspoon met with David Solomon but a deal never happened. Invision
Among the largest Wall Street banks, Goldman has long stood out with its heavy focus on serving companies and other institutions. Rival trading and dealmaking powerhouses JPMorgan and Bank of America, for example, also have nationwide branch networks, while Morgan Stanley has ploughed into wealth management. Under Solomon, Goldman has touted the virtues of becoming a more diversified firm.
It’s easy to see the attraction to digital banking. All over Silicon Valley, so-called fintech startups were raking in venture capital. Those funding deals were slapping multibillion-dollar valuations on young companies, figures that seemed to leap higher in every round. Banks like Goldman, in contrast, weren’t stirring nearly as much excitement among investors. Incubating a fintech inside its own walls could help Goldman climb above the staid pack.
The investment bank’s stock got a big boost during the pandemic as its core Wall Street businesses thrived. But the plans to scale up Marcus never delivered the kind of valuation lift that brash young companies were achieving. Then this year, fintechs fell out of favour as a marketwide rout hit lofty valuations for private companies hard.
Goldman shares have tumbled by 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 a shift away from what’s perceived as the unpredictability of trading and banking.
The company’s price-to-book ratio – comparing the bank’s market value to what the firm says its pieces are worth – has slipped below 1. In other words, shareholders think the company is worth a bit less than its accountants do.
The bank, which for decades has prided itself on the top calibre of its employees, discovered that offering a checking account isn’t as simple as it sounds. 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, the CEO of the neobank Chime, strengthened his conviction that mass checking accounts are a must-have for building a digital bank of the future.
Though Solomon’s team made it a high priority, the technical issues proved challenging. By the time the platform was ready, executives were no longer so certain they wanted to pay for a retail blitz. Other big US banks typically dangle hundreds of dollars in sign-up bonuses to lure new checking customers.
At Goldman, pressure has been mounting on managers to tackle the consumer unit’s expenses. It became all the more acute this year, with analysts projecting profits will drop more than 40 per cent from last year’s record, prompting layoffs and reductions in bonuses.
At mid-year, the bank internally forecast that the unit’s losses would accelerate to more than $US1.2 billion in 2022. That would set cumulative losses on path to exceed $US4 billion. Solomon has blamed the drag on the need to reserve for potential bad loans, but the projection also accounts for the persistent expense of setting up and running the business.
That doesn’t include the price for acquiring installment-loans provider GreenSky in a deal that was initially valued at more than $US2.2 billion last year, which turned out to be the peak of the market for fintech ventures.
Goldman executives still swear by the purchase. The draw for them is the ability to lure more merchants to use the service, and cross-sell more products to the end customers, who tend to have high credit scores.
Shareholders were never that enthused about Marcus. Privately, senior executives concede they get a lot of questions about it from confused investors.
So the outcome of a Solomon meeting with Warren Buffett was a source of amusement for some of those who had faced pointed questions for their inability to win over investors.
As part of his outreach to major shareholders, the Goldman CEO sought out the Oracle of Omaha, explaining how the growth strategy would pay off.
The Berkshire Hathaway chief – known for backing companies that are dominant in their niche – had famously snapped up 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 turning away from the new Goldman, paring his stake in the company.
In 2020, filings show, Buffett took Berkshire’s stake in Goldman down to zero.
— Bloomberg Businessweek
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