David Solomon on why Goldman's consumer ambitions failed

Following Lloyd Blankfein's retirement, David Solomon was chosen to succeed him as Goldman Sachs's CEO in early 2018, banking colleagues working on Marcus felt awave of fear wash over them.

‍

It is ironic that the man who lost out to Solomon, Harvey Schwartz, was one of several original backers of Goldman's foray into consumer banking, and he was often seen pacing the floor in Goldman's New York headquarters where the new division of the company was being built. Do you think Solomon would kill the nascent project if he were to take over?

‍

As soon as Solomon became a part of the business, the executives were ecstatic.

‍

Although they were relieved, their relief lasted only a short time. This is because Solomon made a lot of decisions over the next four years - along with some aspects of the firm's hard-driving, ego-driven culture - that ultimately led to the unraveling of Goldman's consumer ambitions, according to a dozen people who are familiar with the matter.

‍

Marcus's concept - that a Wall Street powerhouse could be transformed into a Main Street player capable of taking on giants such as Jamie Dimon's JPMorgan Chase - had captured the attention of the financial world from the start. In the first three years after Marcus launched in 2016, it attracted $50 billion in valuable deposits — a nod to the first name of Goldman’s founder — as well as a growing lending business. Additionally, Marcus emerged victorious from intense competition between banks to offer Apple’s many iPhone users a credit card.

‍

Is Solomon at risk?

As Marcus morphed from a side project into a focal point for investors hungry for a growth story, it grew rapidly, but the business finally buckled under the weight of Solomon's ambitions as it expanded rapidly. In a reorganization, Solomon split the business apart, killed its new loan product, and slashed an expensive checking account in response to demands to rein in the business.

‍

Solomon is experiencing a sensitive period at the moment as a result of the episode. A little more than four years into his tenure, the CEO finds himself under pressure from a surprising source - disaffected partners at his own company, whose leaks to the press over the past year have accelerated the bank's pivot in strategy and revealed simmering disdain for the high-profile DJ hobby he has undertaken.

‍

Goldman shares have outperformed bank stock indices during Solomon's tenure, which can be attributed to the strong performance of the company's core investment banking and trading operations. However, investors are not rewarding Solomon's earnings with a higher multiple on his earnings, despite the fact that Morgan Stanley, Solomon's nemesis, has developed a greater lead in recent years, with a price-to-tangible book value ratio that is rough twice that of Goldman.

‍

Solomon will be holding his second investor day conference on Tuesday as part of his latest effort to build stable sources of revenue growth. This will add to the stakes during the CEO's second investor day conference. Marcus's costly episode was touted at Goldman's previous investor day in 2020. Investors want an explanation of what went wrong and evidence that management has learned from it.

‍

Origin story

Goldman's chief communications officer Tony Fratto said in a statement, "We've made a lot of progress, and we've been flexible when necessary, and we're looking forward to updating our investors on what has been accomplished and where we're headed in the future," There has been a great deal of progress since our last investor day, and it is clear that many innovations are paying off across our businesses and generating shareholder returns.

‍

When the idea for Marcus was born offsite in 2014 at the vacation home of then-Goldman president Gary Cohn, its architects could not have imagined its journey when it was conceived offsite in 2014. Even though Goldman Sachs is one of the top firms when it comes to advising corporations, heads of state, and the ultrawealthy, it did not operate in the retail banking space.

‍

In part, they gave it a distinct brand so they could distance it from negative perceptions of Goldman Sachs after the 2008 financial crisis, but also so they could spin off the business as a standalone fintech player if they wished to do so, according to people who were well acquainted with the matter.

‍

“As with many things Goldman does, it didn't begin with some grand vision, but at the beginning, it was more like, 'Here's a way I can make some money, so let's go for it,'" one of the people said.

‍

In an ironic twist, Cohn himself was against the retail push, telling the bank's board that he didn't think it would succeed, according to people with knowledge of the matter. So to some extent, Cohn, who left Goldman Sachs in 2017 in order to join President Trump's administration, was an example of many of the company's old guard who believed that consumer finance simply wasn't in the company's DNA.

‍

No comment was given by Cohn.

‍

Paradise lost

Upon taking over in 2018, Solomon initiated a series of corporate reorganizations that would shape the future of the company.

‍

Throughout its early days, Marcus, run by an ex-Discover executive Harit Talwar and Goldman veteran Omer Ismail, was purposefully kept away from the rest of the company as much as possible. Talwar used to tell reporters that the advantages Marcus had over a 150-year-old investment bank were that it was a nimble startup within an established institution.

‍

Solomon reorganized the firm for the first time early on in his tenure, when he folded it into the firm's investment management division, which was a part of his reorganization. A number of people, including Ismail, had opposed the move to Solomon, believing that it would hinder the business's growth.

‍

Solomon's reasoning was that in order for Goldman to be successful, all its businesses catering to individuals should be in the same division, even if most Marcus customers had a few hundred dollars in savings or loans, as opposed to an average private wealth client with $50 million in investments.

‍

It is fair to say that as a result of Solomon's hiring of senior leaders in the engineering, marketing, and personnel areas, Marcus' leaders lost some of their ability to call the shots on engineering, marketing, and personnel matters. There were a number of different activities that Marcus engineers were pulled into, including a project that was aimed at consolidating its technology stack with that of the broader firm, something that Ismail and Talwar did not approve of.

‍

According to one source, Marcus has become a shiny object in the eyes of the public. “Whenever there is a new shiny thing at Goldman Sachs, everyone wants to be the first to leave their mark on it."

‍

‘Who the f—k agreed to this?’

The Apple Card has been the company's greatest consumer success besides its deposits business, which has attracted $100 billion so far.

‍

The lesser-known fact about Goldman Sachs is that it won the Apple account in part because it agreed to terms that other, more well-established credit card issuers refused to agree to. In 2017, when Scott Young, a veteran of the credit-card industry, joined Goldman Sachs, he was flabbergasted at the one-sided terms of the Apple deal, according to people with knowledge of the matter.

‍

“Who the f---k agreed to this?” Young exclaimed shortly after learning of the details of the deal, according to a witness.

‍

A few aspects of the deal related to customer service ultimately contributed to Goldman's unexpectedly high costs for Apple's partnership with Goldman, the people said. The Goldman executives were eager to seal the deal with the tech giant before Solomon took over as CEO of the bank, according to the sources.

‍

There was no comment from Young regarding the outburst.

‍

Due to the rapid growth of the credit card that was launched in 2019, the consumer division experienced mounting financial losses due to the rapid growth of the card. As a result of the looming economic downturn, Goldman Sachs had to set aside reserves in anticipation of future losses, even if those losses didn't materialize. According to a report by Trade Algo last year, the bank ramped up the use of its credit cards, bringing regulatory scrutiny on how it handled customer chargebacks.

‍

Pushing back against the boss

Although Goldman's fintech products were gaining traction at the time, there were growing tensions beneath the smooth veneer of the bank's fintech products. Solomon and his team disagreed on products, acquisitions, and branding, according to the people, who declined to be identified but spoke about internal Goldman matters.

‍

There were times when Ismail, who had a good reputation within the organization and was able to push back against Solomon, lost battles, but held on to others. As an example, Marcus officials had to entertain the possibility of sponsorships with celebrities such as Rihanna, Reese Witherspoon, and others celebrities, as well as contemplate whether the Goldman brand should replace the Marcus brand.

‍

According to the CEO, the bank should offer a checking account in order to compete with fast-growing digital players like Chime. Marcus, on the other hand, did not think the bank had an advantage over those players and should continue to focus on its core business.

‍

Solomon's second reorganization in September 2020, in which Ismail was made co-head of the consumer and wealth division, was one of the final straws that brought Ismail to the brink of bankruptcy. Ismail felt that Cohen's promotion was well deserved because he is known in the industry as a tireless executive who will be even more hands-on than his predecessor Eric Lane, and Ismail thought he deserved the position.

‍

Within a few months, Ismail left Goldman Sachs, sending shockwaves through the consumer division and deeply angering Solomon in the process. For the purpose of this article, Ismail and Talwar declined to comment.

‍

Boom & bust

As a result of Ismail's exit, Marcus was ushered into a new era, an era of failure and dysfunction in which a steep ramp-up in hiring and expenses occurred, blown product deadlines occurred, and waves of talent left the company.

‍

Marcus is now run by two ex-tech executives with no experience in retail, former Uber executive Peeyush Nahar and Swati Bhatia, formerly of payments giant Stripe, Marcus was, ironically, also cursed by Goldman Sach's success on Wall Street in 2021.

‍

Investing in public listings, mergers, and other deals were fueled by the pandemic, resulting in Goldman's most profitable year ever. A portion of Goldman's volatile earnings should be plowed into more durable consumer banking revenues.

‍

“People at the firm, including David Solomon, were like, ‘Go, go go!’” recalled someone familiar with the time. “We have all these excess profits, so you go create recurring revenue.”

‍

‘Only the beginning’

The bank began testing its checking account with employees in April 2022, telling them that it was “only the beginning of what we hope will soon become the primary checking account for tens of millions of customers.”

‍

Nevertheless, it became apparent as the year wore on that Goldman was faced with a very different environment as 2022 rolled around. It has been more than a decade since the Federal Reserve began raising interest rates, which has cast a pall over the capital markets as a result. One of the six largest American banks, Goldman Sachs, was most affected by the declines, and suddenly Solomon was pushing Marcus and other groups to cut costs in order to survive.

‍

After leaks indicated Marcus was hemorrhaging money, Solomon pulled back sharply on the efforts that he had once championed to investors and the media. Saving money on marketing costs would be achieved by repurposing his checking account for wealth management clients.

‍

Ismail, who had resigned from a fintech company called One that was backed by Walmart in early 2021 and had joined a direct-to-consumer startup called One, will now be taking on the banking world with his direct-to-consumer digital startup. During his tenure at Goldman Sachs, he would mainly be content with being a behind-the-scenes player, providing its technology and balance sheet to established companies in need.

‍

With as much self-regard as Goldman has, it would mark a sharp comeback for a company with as much self-regard as Solomon held just months ago.

‍

According to one former Goldman insider, David would say, "We're building the business for the next 50 years, not for today." His own soundbite should have been taken into consideration.”