Goldman Sachs faces Fed scrutiny of money-losing Marcus consumer unit

Goldman Sachs faces Fed scrutiny of money-losing Marcus consumer unit

(Bloomberg) — Goldman Sachs Group Inc.’s six-year foray in consumer banking — the unit dubbed Marcus — is the focus of a new Federal Reserve review.

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Fed officials are reviewing the Wall Street giant’s online banking platform for retail customers, according to people with knowledge of the matter. For at least several weeks, they have been pressing Goldman management with questions and follow-up 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 differs from more frequent industry-wide examinations of business areas of interest. By zeroing in on Marcus, the central bank is taking stock of a department that is relatively new and essentially growing within a company without much of a history of dealing with the general public.

While not indicative of any wrongdoing, it’s another headache as CEO David Solomon moves forward with his ambition to expand Goldman — a high-end dealer — into the consumer world: deposit outflows, credit card issuance and, at some point, offering checking accounts to the masses. The review puts even more pressure on the bank’s leaders to demonstrate their dominance of the business and strengthen controls.

Spokesmen for Goldman Sachs and the Fed declined to comment.

The bank has recently signaled that it is taking a more cautious approach to developing Marcus. Behind the scenes, Goldman Chairman John Waldron has taken a bigger role in overseeing the business in an effort to rein in expenses and bring down losses.

At mid-year, the bank’s internal forecast estimated the business would post a record loss of more than $1.2 billion this year.

The cash burn has become even more painful in recent months as Wall Street’s pandemic-era deal boom winds down, making Marcus a hot topic among Goldman executives. Investment bankers and traders bracing for job cuts or lower bonuses are vying for a division that was once supposed to collapse in 2022 but has instead eaten up more than $4 billion since it was founded in 2016. That doesn’t include the buyout by Installment Loan Provider Goldman GreenSky Inc. in a deal initially valued at more than $2.2 billion last year, in what turned out to be the pinnacle of the market for fintech businesses.

As business lines such as investment banking, capital markets and asset management decline, analysts are predicting the company will see a more than 40% drop in net income this year. Shares are down 15% since 2022 began amid a broader selloff in financial stocks.

Falling profits have Goldman tightening its belt. Bank leaders earmarked 31% less for compensation in the first half. And in recent weeks, they have been preparing to restart an annual slaughter cycle that had been interrupted during the pandemic, drawing up plans to eliminate several hundred roles.

Waldron’s efforts to get Marcus back on track are welcomed outside the bank. Credit Suisse Group AG analyst Susan Katzke wrote in a note last month that she had received assurances from Goldman management that while the firm remains committed to such growth initiatives, it is shifting its focus to wealth management and less to retail banking. The Waldron-led team promised a narrower focus on consumer banking after acknowledging the company “tried to do too much at once,” according to the report.

Some key executives who helped launch the consumer business are no longer with the company. They include former Chief Financial Officer Stephen Scherr, Harit Talwar, a consumer banking veteran who was hired for his retail expertise, and Omer Ismail, who left to run a new banking business backed by Walmart Inc.

Other authorities have also shown interest in Marcus. Goldman last month disclosed an investigation by the Consumer Financial Protection Bureau into the company’s credit card practices, including how the lender resolves erroneous accounts and processes refunds. Such investigations usually result in modest fines and operational modifications that do not endanger the business.

But for Goldman, it’s an unwelcome intrusion into a flagship partnership with Apple Inc., a major client that trumpeted its partnership with the lender when the two companies expanded into credit cards in 2019.

(Updates with stock performance in ninth paragraph.)

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