Goldman: This Is The Remix

I’m sure consumer banking sounded like fun at Goldman, but it’s turned into a hassle. Worse, it’s not profitable, or at least not yet, and Goldman’s business is making lots of money not losing it.

The story of Goldman Sachs, provider of basic financial services to Average Joe, was always a bit of an absurdist tale. In its infancy, I’d have described it as a well-meaning charade to dispense with various unflattering characterizations of the bank, but a charade nevertheless.

The appeal of digital banking, and a limited suite of direct-to-consumer offerings, is fairly straightforward, but it gets pretty complex, pretty fast after that. And besides, it’s never been entirely obvious that Goldman needed to be a “more diversified” firm. Or at least not where diversity means branching out into businesses which (forgive me) are almost oxymorons in the context of Goldman Sachs as the world knows it today. If you want to improve your public image, you hire in PR, you don’t wade into businesses where the dominate players have shepherd’s tree-deep roots. As Mike Mayo put it over the summer, modern consumer banking is a business where new entrants can either discover gold or “get your head handed to you.”

When it comes to digital banking, Goldman’s aspirations might’ve been misplaced, the result of fintech FOMO. To the extent Goldman thought it could build a kind of in-house Y Combinator for fintech unicorns, the bank would’ve probably been better off just throwing money at VCs. The idea of Marcus (named for the 110-years-dead son of a Bavarian cattle farmer) as some sort of leading-edge tech powerhouse could only incubate for longer than a year in the mind of a 60-year-old, self-styled DJ.

This didn’t start entirely with David Solomon, but he’s been a staunch advocate. His pitch is simple enough. Because dealmaking, underwriting and trading can be volatile businesses, Goldman might benefit from the addition of a more predictable source of revenue and, eventually, earnings. The problem is twofold.

First, and most obviously, Goldman is famously good at investment banking and trading. Sure, there are missteps and land mines, but Goldman “won” its reputation as a blood-sucking cephalopod by succeeding, lavishly, in the business lines it’s already in. “If it ain’t broke,” DJ.

Second, in order for a new business to act as a buffer against volatility, it helps if that business is itself profitable. By some accounts, consumer banking at Goldman is way behind schedule on that front.

With all of that in mind, it came as no real surprise when the Wall Street Journal reported that Goldman is set to “undertak[e] one of the biggest reshuffles in the firm’s history.” Asset management and private wealth will be rolled up, as will IB and Markets, while the consumer unit will be split into pieces and redistributed, for lack of a better way to put it.

In a follow up piece (and it’s difficult to discern who’s following who, given that Dow Jones’s story just validated allusions made to an imminent shakeup in previous articles published elsewhere), Bloomberg confirmed what amounts to a re-consolidation. It’s the third reorganization in four years, but it’s really a rolling back of the last shakeup.

Solomon, Bloomberg said, is “disbanding the direct-to-consumer efforts, cutting short the retail banking dreams that he had spelled out in his early days as CEO [amid] cost overruns and missed profitability goals [which] set off a rising tide of discontent inside the firm.” Those same dreams drew scrutiny from regulators recently, and were becoming a distraction for shareholders.

Apparently, Solomon will combine the installment-lending firm Goldman bought a year ago with the bank’s credit card businesses into something called “Platform Solutions,” which will also include the bank’s corporate deposits operation. The consumer-facing part of Marcus will be folded up into wealth management, according to the same reporting.

The shakeup entails personnel changes. Sort of. The names are all familiar, so it feels more like rearranging expensive furniture in an effort to cover up a large carpet stain. Marc Nachmann will run Wealth and Asset Management, IB and trading will go to Dan Dees, Jim Esposito and Ashok Varadhan, and Stephanie Cohen will take a shot at Platform Solutions. (Wish her luck.)

Goldman may or may not disclose the scope of losses in Platform Solutions on Tuesday, when the bank reports Q3 results. And that’s really why I felt compelled to weigh in on this again. It’s news, but it’s not entirely new. This is a slow-burning story that’s unfolding about like you’d expect given incremental news flow over the past year. Solomon’s latest “remix” will presumably be a focal point Tuesday (and likely for the rest of the week), so I wanted to have an “anchor” article.

As Bloomberg detailed in a feature piece published earlier this month, the bank’s internal forecasts suggested the consumer unit would lose at least $1.2 billion this year, pushing total losses above $4 billion. Solomon cited the necessity of setting aside reserves for “potential bad loans,” but as the linked article noted, somewhat dryly, the forecasts also included “the persistent expense of setting up and running the business.”