Scrutiny of Goldman Sachs’ Money-Losing Marcus Consumer Unit

Scrutiny of Goldman Sachs’ Money-Losing Marcus Consumer Unit

(Bloomberg) — Goldman Sachs Group Inc.’s six-year provision on consumer banking – the unit known as Marcus – as the focus of a new review by the Federal Reserve.

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Fed officials are looking at the Wall Street giant’s online banking platform aimed at retail customers, according to people with knowledge of the matter. For at least several weeks, they have been peppering Goldman management with questions and follow-ups in a process that is still ongoing, the people said, asking not to be identified discussing confidential information.

The review goes beyond the central bank’s regular oversight of the firm, and is distinct from its more frequent industry-wide look at lines of business interest. By zeroing in on Marcus, the central bank is looking at a relatively new and substantially growing division within a company with little history of dealing with the general public.

While not indicative of any wrongdoing, it is another headache as Chief Executive Officer David Solomon marches forward with his ambition to expand Goldman — a high-end financial merchant — into the consumer world: increasing deposits, credit cards issuing and, at some point, offering checking accounts to the masses. The examination puts even more pressure on the bank’s leaders to show their control of the business and to tighten controls.

Representatives for Goldman Sachs and the Fed declined to comment.

The bank recently indicated that it is taking a more cautious approach to Marcus’ growth. Behind the scenes, Goldman President John Waldron has taken on a greater role in overseeing the business in an effort to bring expenses in line and stem losses.

In the middle of the year, the bank’s own internal forecast estimated that the business would post a loss of more than $1.2 billion this year.

The cash burn has worsened in recent months as Wall Street markets have boomed in the pandemic era, making Marcus a source of concern among Goldman managers. Investment bankers and traders seeking job cuts or lower bonuses are competing with a division that was once supposed to break even in 2022, but instead has eaten up more than $4 billion since it was founded in 2016. Excluding then Goldman’s acquisition of an installment-loan provider. GreenSky Inc. in a market that was initially valued at more than $2.2 billion last year at the peak of the market for fintech ventures.

With lines of business such as investment banking, capital markets and asset management cooling, analysts predict the firm will drop more than 40% in net income this year. The shares have fallen 15% since the start of 2022 amid a broader selloff in financial stocks.

The earnings slump has Goldman tightening its belt. Bank bosses set aside 31% less in compensation in the first half. And in recent weeks, they have been preparing to resume an annual cycle of culling that was paused during the pandemic, sketching plans to eliminate hundreds of roles.

Waldron’s efforts to get Marcus back on track outside the bank are welcome. Credit Suisse Group AG analyst Susan Katzke wrote in a note last month that she was convinced by Goldman’s management that, even as the firm remains committed to such growth initiatives, it is shifting the emphasis toward wealth management and less on retail banking. The Waldron-led team pledged a narrower focus on consumer banking after admitting the firm “tried to do too much at once,” according to the report.

Several key executives who helped build the consumer business are no longer with the company. They include former CFO Stephen Scherr, Harit Talwar, a consumer banking veteran brought on for his retail know-how, and Omer Ismail, who left to run a new banking venture backed by Walmart Inc.

Other authorities also showed interest in Marcus. Last month Goldman disclosed a probe by the Consumer Financial Protection Bureau into the company’s credit card practices, including how the lender resolves incorrect bills and processes refunds. Such investigations usually result in modest fines and operational changes that do not jeopardize the business.

But for Goldman, the marquee partnership with Apple Inc., a major client whose partnership with the lender became successful when both firms expanded into credit cards in 2019, is an unwelcome intrusion.

(Updates with share performance in the ninth section.)

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