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“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 Inc.
The 153-year-old merchant of high finance enlisted TV star JoJo Fletcher to help it reach out to a whole new crowd. Marcus jingles swarmed the airwaves.
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 Chase & Co. and Bank of America Corp., for example, also have nationwide branch networks, while Morgan Stanley has plowed 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 firm’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 favor as a market-wide 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.
Earnings Plunge
The bank, which for decades has prided itself on the top caliber 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 signup 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% 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 $1.2 billion in 2022. That would set cumulative losses on path to exceed $4 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 Inc. 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 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 Inc. 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.
More stories like this are available on bloomberg.com
©2022 Bloomberg L.P.
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