Breakingviews: Goldman’s Marcus is a lesson in self-made failure

If David Solomon is taking the blame for the demise of Goldman Sachs’ upstart digital bank, it’s partly by accident. Almost all the other executives who publicly championed the project known as “Marcus by Goldman Sachs” departed the $120 billion Wall Street bank long ago. Even so, with the firm now on the back foot, and Solomon’s pay last year cut by 30%,it falls to the boss to try and recover lost ground.

Being a consumer bank was a good idea when Goldman’s leaders cooked it up eight years ago. They already had a banking licence, a huge balance sheet, and experience dealing with finnicky regulators. By offering unsecured loans and savings accounts, then-finance chief Marty Chavez explained in 2017, Goldman could make a return on equity in the mid-teens, more than enough to justify its investment.

Fast forward to 2023, and consumer banking is still highly lucrative. The giant retail arms of JPMorgan and Bank of America both make a return on equity of around 35%. Yet Goldman last month shelved its bid to be a retail powerhouse. It will stick to running credit cards for companies such as Apple and General Motors, offering online savings products and making buy-now-pay-later loans. The long-awaited Marcus checking account will only be available for VIPs. Solomon calls this a “narrowing.” Really, it’s a climbdown.

The roots of Goldman’s failure are the same as its initial success: people. Lloyd Blankfein, who as Solomon’s predecessor launched Marcus, recognized that Goldman bankers weren’t experts in consumer finance. So he brought in specialists like former Discover Financial Services executive Harit Talwar, to join long-term Goldman folks like Stephen Scherr, later the firm’s chief financial officer, and Omer Ismail. They got capital, Goldman’s risk and compliance apparatus, and freedom to try new things, including wearing Converse sneakers to work.

Before long, tensions mounted. One source of discord, according to multiple people familiar with the situation, was the Wall Street pay structure. Goldman tends to reward managing directors generously, but more junior vice presidents would graft for sometimes one-quarter of the rewards and the hope of future promotion. The practice of working through the night is common in the investment banking division Solomon once headed but rare in consumer banking. Projects for demanding partners like Apple magnified the workload.

Goldman’s inherent sense of superiority also proved a mixed blessing. The firm decided to build rather than buy, since history suggested that was a way to avoid the painful clash of cultures arising from mergers like Citicorp’s union with Travelers, or Morgan Stanley’s with Dean Witter. But it also resulted in laboriously reinventing the wheel. For example, Goldman’s engineers had to fight to host consumer banking systems on the cloud rather than on the bank’s own servers.

In the end, Solomon’s top-down style and penchant for reorganizations proved the death knell. In January 2020 he remapped the company, combining consumer banking and wealth management in a new unit run by Goldman veterans lacking experience of retail financial services. That left Marcus without a representative on Goldman’s elite management committee. That year, nobody from the consumer bank was promoted to the firm’s prestigious partner level.

Eventually, Talwar and Ismail quit, followed by Scherr and a raft of other engineers and executives. Blankfein had retired. Chavez and former finance chief Harvey Schwarz were gone too. Solomon drafted in Peeyush Nahar, a former Uber executive, and Swati Bhatia, who recently retired after just two years at the firm. “We haven’t had all the talent that we’ve needed,” Solomon lamented in January.

With ambitious Wall Streeters in charge and a shortage of consumer expertise, it’s little wonder Marcus ended up, in Solomon’s words “doing too much.” Only last February, the Goldman boss upped the firm’s deposit and lending targets. The push for a checking account, which Solomon strongly backed, met with resistance from senior Marcus staff. When investment banking fees dried up last year, the bank lost its appetite for hefty investments with uncertain returns.

The irony is that while Marcus won’t become a digital superbank, its component parts are performing well. The consumer operations have generated around $5 billion of losses, but that comes in the context of Goldman’s nearly $60 billion of cumulative earnings over the last five years. The Apple card has brought the firm high costs, but Goldman topped JDPower’s consumer satisfaction rankings for midsize card issuers in 2022.

Moreover, it’s not obvious the rise and fall of Marcus has distracted Goldman from its traditional profit engines. Despite a slump in dealmaking activity, the firm reported higher investment banking fees than any of its rivals in 2022. Its equity traders generated more revenue than Morgan Stanley’s in 2022, and the company’s book value per share has increased 40% since the end of 2019.

Even if Goldman can return Marcus to profitability, it can’t win back lost time. As the firm tried vainly to be the “leading consumer banking platform,” rival Morgan Stanley was successfully pushing into wealth management, which now brings in half its revenue. Solomon’s new idea of targeting individuals through their employers is one Morgan Stanley hit on three years ago. A plan to pitch alternative investments to wealthy clients is more Goldman-like, but involves taking on established giants like Blackstone.

The stakes are also higher now. One reason for launching Marcus was to provide Goldman with more stable revenue to offset swings in its trading and dealmaking arms. That volatility is why investors pay one-fifth less per dollar of Goldman’s earnings than Morgan Stanley’s. It’s a discount senior employees, who are often paid in stock, are quick to lament. And even if it’s not all Solomon’s fault, it’s definitely his problem.