Goldman Sucks

Malt Liquidity 81

What happened, man?

A little while ago, I wrote about Goldman’s changing reputation:

Goldman just isn’t the same anymore. They went from selling structured products in the guise of “managing risk” to Greece, Libya, and Malaysia with the intention of profiting by taking the other side and being labeled a “vampire squid wrapped around the face of humanity” to making retail credit cards and “high yield” savings accounts.

Recently, we found out exactly how well Goldman did in this transition of business verticals:

Goldman Sachs Group Inc. said a big chunk of its consumer lending business lost slightly more than $3 billion since 2020, revealing for the first time the costly toll of the Wall Street giant’s Main Street push…

Goldman on Friday disclosed that its Platform Solutions unit lost $1.2 billion on a pretax basis in the nine months that ended in September 2022. It lost slightly more than $1 billion in 2021 and $783 million in 2020, after accounting for operating expenses and money set aside to cover possible losses on loans.

The company that found a way to fuck everyone over from Gaddhafi to Nomura and Credit Suisse couldn’t figure out a way to fuck over retail credit users? Utterly astonishing. Chalk another one up to Apple’s casualty list:

Sachs reported a pretax loss for its credit card division of over $1.2 billion for the first nine months of 2022 and a $1 billion pretax loss for 2021. Sources told Bloomberg the losses were “mostly tied to the Apple Card.” Meanwhile, it was also reported that of the roughly $2 billion of total losses in 2022, most stem from the Apple Card and fintech installment-lending platform GreenSky.

Goldman Sachs has been on top of the league tables since I was born. Of all the business lines I’ve seen propagated by bulge brackets, how is retail credit the one that they’ve seemingly struggled with the most? It’s solved to the point of roadside payday loan lenders able to turn a profit. Look, I understand the idea of taking a loss initially in investment to scale usage. JPM expertly used this strategy with the Chase Sapphire Reserve initially,

JPMorgan Chase’s Reserve credit card should deliver a good return despite it initially costing the bank at least $200 million to $300 million, CEO Jamie Dimon told CNBC on Wednesday.

to the point where conversations about fucking credit cards are so commonplace between yuppies that it bores me to the point of tears to engage in yet another conversation about credit card rewards points, or as I call them, food stamps for millenials.

However, these losses are enormous relative to what JPM was losing on the initial marketing of those cards. JPM’s losses were primarily tied to sign-up bonuses, and disrupting the high-end credit card market naturally will require some marketing to hook high-spenders. Furthermore, with how intuitive the application for Apple Cards was — you literally just need to open up Apple Pay to get one — and how putrid the bonuses and rewards were, how did they lose a billion dollars in a year on them? Surely the infrastructure to set up a payment card on Apple Wallet was already built by, y’know, Apple. What was all the investment for?

Looking a bit closer, I think Goldman is running into the same problem that all these buy now pay later startups are running into, in that the credit environment is simply much riskier than implied with higher rates and a more volatile economic situation. When the interest rates are virtually zero, equities are pumping in a low volatility environment, and people are generally doing alright, you can offer cheap-looking sticker rates while the spread of the debt you’ve raised to invest in the new business line vs what you’re offering it at is lower in absolute value than in a non-zero rates environment. As is obviously evidenced by the reaction of potential homeowners to the current climate of mortgage rates, people still haven’t processed what “real” interest rates look like. Furthermore, credit scores indicate a probability of default, but not an exact timeline of when this default comes. If you’ve reliably maintained a credit score of 750 for 10 years, but are out of a job for the first time in that span, your instant creditworthiness might be lower than implied. Creditworthiness is inherently going to lag your actual liquidity situation. Personal credit defaults happen all the time, but I suspect Goldman across both its lending products and its credit products didn’t fully account for the chance that a lot of these defaults would come at once. Intuitively, you wouldn’t want to treat default probabilities in a vacuum — when one tranche starts to show some defaults that aren’t one-off instances, you’d naturally assume that the other tranches would correlate. Default probabilities are likely higher than their scores would ever imply.

In the long run, these retail credit businesses almost certainly make money. Lending for interest is an archaic business and pretty hard to fuck up without taking on massive leverage or credit risk. At the same time, when you are behooved to shareholders, let alone profit-sharing partners, you simply don’t have the time to say “on a 10-year time horizon, this business will make money.” For better or worse, banking at a place like Goldman is about making as much money as you can on a year’s timeline, so you can keep your employees happy with bonuses. This isn’t a retail SocGen operation. It might be time to cut the fat.

The No Good, Very Bad environment gets worse…

I have talked about SPACs plenty in conversations, but my main gripe with the structure, other than the ability to sell bullshit revenue prognostications and abuse reverse mergers, was that it was incredibly lucrative for investment banks — not only were these worse businesses than traditional IPOs, the structure was incredibly favorable for the proprietors and the underwriters:

Shares of companies that obtained a stock market listing in a SPAC merger from 2019 through the beginning of March were down roughly 36% on average from when their deals closed, according to data provided by Jay Ritter, a professor of finance at the University of Florida. That’s even worse than the 14% decline in shares of companies that went public through traditional IPOs during the same period, according to Nasdaq Inc. All told, according to Vanda Research, retail investors lost $4.8 billion, or 23%, of the aggregate $21.3 billion they plowed into SPACs from the beginning of 2020 to the first week of April 2022.

Yet the deals that brought those shares to market have yielded a bonanza for investment banks. Industry tracker Coalition Greenwich estimates that banks booked about $8 billion in SPAC-related fees in 2020 and 2021. That represents roughly 6.5% of total U.S. investment banking fees that major banks collected in that period, according to Coalition Greenwich.

Now that the SPAC and IPO markets are both dead, well, how is Goldman doing otherwise?

Fourth-quarter profit plunged 66% from a year ago at Goldman Sachs Group Inc. … reflecting a continued slowdown in the corporate deal-making that had fueled record earnings a year earlier.

No golden goose lays eggs forever, and I’m not going to disagree that a bank should, you know, take advantage in whatever way they can of a low rates environment. But Goldman’s issues indicate a larger conundrum on how we project returns on asset classes from here on out. It’s seemingly contradictory that banks would struggle as rates rise, but investment banks are less lenders collecting a spread on offered vs internalized interest and more facilitators of debt-fueled transactions. In a higher rates environment, default probabilities for debt issuers are higher, which means that it’s harder to find buyers of that debt (as we looked at the other day, where you can totally take it on the chin on something like CVNA.) Without being able to issue debt, it’s harder to close a merger. Every single business line is getting crunched — the trading environment is rougher (while volatility is up, the insane trading frenzy is definitively over, not to mention it’s harder to make money reliably in multi-directional markets), the IPO market is dead, and traditional bank activities like M&A and debt issuances have slowed as well. It continues to be the case that all parts of the economy — venture capital, tech, private equity, banking, and more — have to wean themselves off of financial heroin.

The nice part about being an individual, though, is that you don’t have a mandated prospectus. You don’t have to allocate resources to a core business or investment strategy. You can simply take what is given to you — in this case, new debt issuances when the FFR continues to rise. Government treasuries are the deepest market in the world — not looking as awful compared to 3 years ago now, are they?