BLOG

Goldman Sachs has reportedly grown cautious on consumer lending, signaling concern over what stage the credit cycle is in. The bank has reportedly cut its loan-originations target for its Marcus unit, according to Bloomberg, citing people familiar with the matter who requested anonymity. 

Goldman Sachs leaders including new Chief Executive Officer David Solomon have made Marcus a pillar of their plan to boost revenue over the next several years. The unit has grown quickly -- lending more than $4 billion in under two years -- prompting questions from analysts and investors on how the portfolio will perform in a downturn when more consumers have trouble paying off debt. -Bloomberg

Many have wondered if Goldman has been operating too far outside of its wheelhouse, as Marcus "represents a major departure" from the bank's traditional investment bank and trading business. Goldman execs, meanwhile, have relied on new technology to turn "unsecured personal loans into a math problem.

Goldman Sachs hired Harit Talwar from Discover Financial Services in 2015 to help build a digital consumer business. Marcus started making loans in 2016 and this year expanded its deposit business into the U.K. The firm also created a separate division for its lending activities overseen by Stephen Scherr, who last month was named Goldman’s chief financial officer. -Bloomberg

And as we reported in May, that math includes borrowers with sub-660 FICO scores. That's right: Goldman is now a subprime lender itself, because through its retail-facing bank, which both collects deposits and issues loans, subprime borrowers have emerged as one of the most important client bases of the FDIC-backed hedge fund which until just 2 years ago had no conventional, retail-facing banking operations whatsoever.

However, as the contribution of prop, flow and FICC trading - historically Goldman's bread and butter - to the company's revenue declined as trillions in central bank liquidity removed risk and volatility from markets, Goldman was forced to find alternative revenue streams. As a result, over the past year and a half, Goldman built out a digital banking arm which it acquired from GE Capital Bank.

Goldman's plan for Marcus was to boost annual revenues by $5bn by 2020 following several years of lackluster growth from its core businesses. And herein lies the rub, because as FT reported earlier this yearGoldman has been targeting riskier borrowers, supplying about one-fifth of its loans to people with credit scores below 660 on the commonly used FICO scale; there is a familiar name for this group of borrowers: "subprime."

The growth of Marcus, meanwhile, has been rapid amid the lowest unemployment in nearly 50 years, while total household debt in the US hit a record earlier this year according to the New York Fed. 

Personal loans have surged to a record and are the fastest-growing U.S. consumer-lending category, according to data from credit bureau TransUnion. Outstanding balances stand at about $125 billion. And a lot of that growth is coming from fintech companies, which originated more than a third of total personal loans in 2017 compared with less than 1 percent in 2010. -Bloomberg

On Goldman's most recently quarterly earnings call, CFO Marty Chavez said that the loss rate on the Marcus loan portfolio was around 5%.

Chairman Lloyd Blankfein, meanwhile, gave a June clue for the bank's sudden caution: If customers default on unsecured loans, Goldman eats the loss. There is no home to repossess

The bank has worked hard on Marcus - even hiring an Instagram model and former "bachelorette" contestant, Jojo Fletcher, as a spokeswoman for the endeavor. 

As we suggested five months ago, Goldman has become the very company that just ten years ago it wanted nothing more than to short into oblivion.