Why Goldman’s Marcus project failed and what it means for CEO Solomon

When David Solomon was elected to replace Lloyd Blankfein as Goldman Sachs CEO at the beginning of 2018, the fear that struck the bankers working in a modest company known as Marcus.

Solomon’s loser, Harvey Schwartz, was one of the firm’s original proponents in consumer banking and was often seen on the floor of Goldman’s New York headquarters where he built it. Will Solomon kill the project he is about to start?

The executives were thrilled when Solomon immediately accepted the business.

However, the relief was short-lived. That is because many decisions Solomon made over the next four years – along with hard-charging aspects, ego-driven corporate culture – ultimately led to the collapse of Goldman’s consumer ambitions, according to twelve people with knowledge of the matter.

The idea behind Marcus – the transformation of a Wall Street powerhouse into a Main Street player who can take on giants such as Jamie Dimon. JPMorgan Chase – stunned the financial world from the start. In three years after its launch in 2016, Marcus – the first name of the founder of Goldman – attracted $ 50 billion in high-value deposits, has a large credit business and has won the intense competition between banks to issue credit cards to many iPhones Apple. user.

But when Marcus morphed from a side project to a focal point for investors hungry for growth stories, the business quickly expanded and ultimately buckled under the weight of Solomon’s ambitions. Late last year, Solomon gave up on demands to keep the business, separate it in a reorganization, kill its prime loan product and keep its expensive checking account.

The episode comes at a sensitive time for Solomon. More than four years into his position, the CEO faced pressure from an unlikely source – partners who were not happy with his own company, who leaked to the press last year accelerated the pivot of the bank’s strategy and revealed his displeasure about the high-profile DJ hobby.

Goldman shares have outperformed bank stock index during Solomon’s tenure, helped by the strong performance of its core trading and investment banking operations. But the investors did not reward Solomon with higher income, but his nemesis Morgan Stanley has opened up a wider lead in recent years, with a price to actual book value ratio roughly twice that of Goldman.

That raises the stakes for Solomon’s second investor conference on Tuesday, when the CEO will outline his latest plans to build a long-lasting source of revenue. Investors want an explanation of what went wrong at Marcus, which Goldman called an investor day earlier in 2020, and evidence that management has learned lessons from the costly episode.

“We’ve made a lot of progress, been flexible when needed, and we look forward to updating investors on that progress and the path forward,” Goldman communications chief Tony Fratto said in a statement. “It’s clear that a lot of innovation since the last investor day paid for the business and generated returns for shareholders.”

Marcus Architects could not have predicted the journey when the idea was born offsite in 2014 at the vacation home of Goldman president Gary Cohn. While Goldman is a leader in advising companies, heads of state and the wealthy, it is not in retail banking.

They gave it a different brand, partly to distance themselves from negative perceptions of Goldman after the 2008 crisis, but also because it would allow them to spin off the business as an independent fintech player if they wanted to, according to people with knowledge of the matter.

“Like a lot of things Goldman started, it wasn’t a grand vision, it was more like, ‘This is how we can make money,'” one person said.

Ironically, Cohn himself opposed the retail push and told the bank’s board he didn’t think it would succeed, according to people familiar with the matter. In that way, Cohn, who left in 2017 to join the Trump administration, is emblematic of many of the company’s old guards who believe consumer finance is not in Goldman’s DNA.

Cohn declined to comment.

After Solomon took over, in 2018, he began a series of reorganizations of the company that would affect the path of the embryonic business.

From the beginning, Marcus, led by ex-Discover executive Harit Talwar and Goldman veteran Omer Ismail, was deliberately shielded from other companies. Talwar was happy to tell reporters that Marcus had the advantage of being a nimble startup at a 150-year-old investment bank.

The first of Solomon’s reorganizations came early in his tenure, when he joined the company’s investment management division. Ismail and others have objected to moving to Sulaiman, feeling it would hinder the business.

Solomon’s reasoning is that all Goldman businesses serving individuals should be in the same division, even though most of Marcus’ customers only have loans or savings of a few thousand dollars, while the average personal wealth client has an investment of $50 million.

In the process, Marcus leaders lost some of their ability to create their own image in terms of engineering, marketing and personnel, partly because of the senior hires Solomon had created. Marcus’s engineering resources were pulled in different directions, including into projects to integrate the technology stack with the broader company, a move that Ismail and Talwar disagreed with.

“Marcus became a shiny object,” said one source. “At Goldman, everyone wants to leave their mark on the shiny new thing.”

In addition to the deposit business, which has now attracted $100 billion and actually printed money for the company, the biggest consumer success was the launch of the Apple Card.

What’s less well-known is that Goldman won the Apple account in part because it agreed to terms that other card issuers wouldn’t. After credit card industry veteran Scott Young joined Goldman in 2017, he was surprised by the one-sided element of the Apple deal, according to people familiar with the matter.

“Who agreed to this?” Young shouted at the meeting after learning the details of the deal, according to people present.

Some of the customer service aspects of the deal were ultimately compounded by Goldman’s unexpected fees for the Apple partnership, the people said. Goldman executives were eager to close the deal with the tech giant, which happened before Solomon became CEO, he added.

Young declined to comment on the outburst.

The rapid growth of the card, which was launched in 2019, is one of the reasons why the consumer division suffered financial losses. Heading into an economic downturn, Goldman must set aside reserves for future losses, even if they don’t happen. The card’s ramp-up also brings regulatory scrutiny to how it handles customer chargebacks, CNBC reported last year.

Beneath the smooth veneer of the bank’s fintech products, which they gained traction at the time, there are many tensions: disagreements with Solomon over products, acquisitions and branding, said the person, who declined to be identified speaking about internal Goldman matters.

Ismail, who was also considered internal and had the ability to push back against Solomon, lost some battles and held the line in others. For example, Marcus officials should entertain potential sponsors with Rihanna, Reese Witherspoon and other celebrities, as well as learn whether the Goldman brand should replace Marcus.

The CEO is said to be enthusiastic about fast-growing digital players such as Chime and believes Goldman should offer checking accounts, while boss Marcus doesn’t think the bank has any advantages and should continue to be a more focused player. .

One of the last straws for Ismail came when Solomon, in the second reorganization, made the head of strategy, Stephanie Cohen, co-head of the consumer and wealth division in September 2020. Cohen, known as a tireless executive, will be even more hands-on from his predecessor, Eric Lane, and Ismail felt that he deserved promotion.

Within months, Ismail left Goldman, sending shockwaves through the consumer division and angering Solomon. Ismail and Talwar declined to comment for this article.

Out Ismail who led in the new, the end of the disaster for Marcus, a dysfunctional period that included a steep ramp-up in hiring and expenses, blown product deadlines and waves of talent departures.

Now run by two ex-tech executives with little retail experience, ex-Uber executive Peeyush Nahar and Swati Bhatia, formerly of Stripe, Marcus is slated for Goldman’s success on Wall Street in 2021.

A pandemic-driven boom in public listings, mergers and other deals means Goldman is entering a banner year for investment banking, its most profitable yet. Goldman needs to parlay some of its volatile earnings into more durable consumer banking profits.

“People in the company including David Solomon were like, ‘Go, go, go!'” said a person familiar with the period. “We have all these excess profits, you create a recurring profit.”

In April 2022, the bank expanded checking account testing to employees, telling staff that “it’s just the beginning of what we hope will be the primary checking account for tens of millions of customers.”

But in 2022, it became clear that Goldman was facing a very different environment. The Federal Reserve ended a decade-plus of cheap money by raising interest rates, triggering capital markets. Among the six largest American banks, Goldman Sachs is the most hurt by the refusal, and suddenly Solomon is pushing to cut expenses in Marcus and others.

Amidst leaks that Marcus was shelling out money, Solomon finally decided to back down quickly on the effort he had once championed for investors and the media. His checking account will be reused for wealth management clients, which will save him money on marketing costs.

Now Ismail, who is joining a Walmart-backed fintech called One in early 2021, is set to take on the banking world with a direct-to-consumer digital startup. His former employer, Goldman, will be happy to be a back-up player, providing technology and balance sheet to the established brand.

For a self-proclaimed company like Goldman, it would mark a retreat from the vision held by Solomon just a few months ago.

“David would say, ‘We’re building the business for the next 50 years, not for today,'” said one former Goldman insider. “He should listen to his own voice.”