150-Year Old Startup

Almost two hundred years ago, there was a Jewish kid named Marcus living in Germany who loved math. His family did not have much money, so he always helped his dad at work. The business was cattle auctions, and Marcus was in charge of the numbers. He took advanced math classes in school, and met a friend three years older, Joseph, the son of a saddle maker.

Marcus’ parents worried about life as a young Jew in Germany, so they sent him and his brother to America. They landed in Philadelphia in 1848. His brother went straight for the gold rush in California. Marcus stuck around. As luck would have it, Marcus ran into his old pal Joseph, who arrived in America earlier in the year. Joseph was moving for a new job in Baltimore, so he gave Marcus the room he already rented. Marcus started working right away, helping the landlord’s son sell small items from the back of a horse-drawn wagon.

Marcus learned English and spent the next two decades as a simple street peddler and shopkeeper. He studied the day to day needs of small businesses on those streets, which gave him a bigger idea that he moved with, to New York City.

Marcus began peddling small I-O-U’s. Terms like commercial paper were coined later, but they are all simply loans whose street value is based on the ability of the underlying businesses promising to pay them back. Naturally, Marcus wanted his customers’ little businesses to succeed. Simple relationships and mutual trust spread. In 1869, he opened a shop in Manhattan to broker these I-O-U’s and hung his own shingle: “Marcus Goldman, Banker and Broker.”

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Unlike his established competitors, Marcus did all the work himself, with only one part-time bookkeeper in his small basement office. Hustling up and down nearby streets every day, on foot, he found quality I-O-U’s to buy from businesses at a discount. After each deal, he tucked the simple note inside the band of his silk hat. He took those loans to banks and negotiated deals to sell them, keeping a 0.5% commission.

Marcus Goldman prized ambition, hard work, and family. He infused those ideals into a professional and personal life that straddled ethnic and societal boundaries. During the workday, he attended to the needs of his working-class customers with attention and diligence.” -Sheri Kaplan (Biographer/Immigrant Entrepreneurship 1720-Present)

At his 60th birthday party, Marcus Goldman invited his buddy Joseph Sachs’ son, Samuel, to join the business in 1881. Marcus purchased a seat on the NYSE in 1896. The following year, the Rothschild family publicly vouched for the company saying, “Goldman Sachs is one firm about whom nobody can say anything against.

Things sure did change…a few times.

I grew up in the investment business in the 1990s with a very different Goldman Sachs. They wanted nothing to do with working class families like mine. They served the ultra-high net worth with white gloves of exclusive access to the smartest smart money solutions. Were the really that smart? Yup…just ask ‘em! Over-achieving kids dreamed of an internship at Goldman Sachs back then, like the unicorn hunters begging to get on Silicon Valley bandwagons over the past decade.

I never had that dream, probably knowing that a slumdog thousandaire from Texas did not have the wardrobe for an interview. I hated the arrogance that came with it all, on both sides of the table. Now you know why this blog is a virtual hug to the “Merely Wealthy,” I prefer to serve instead. None of us had $25mm+ minimums to earn a peek inside Goldman Sachs thick glossy pitch-books.

I vividly recall one of the grizzled old veterans at Smith Barney (the firm where I started, which then was purchased by Citigroup in 1998) barking about the brokerage industry’s shares: “Sell ‘em when we’re hiring…buy ‘em when we’re firing.” I was too busy in my little cubicle to worry about that, fighting over one screen attached to a computer’s lazy susan, swiveling back and forth among open-air suitemates. Turns out he was kind of on to something…

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This chart shows the change in total number after already absorbing all the new employees, post-buyout. I escaped just above Gekko’s left bicep in this chart, in the middle of 2006, right before the credit crisis. I did not know exactly what was going to happen next, just had a strong hunch it would not be good, because I did not like the odds from crowded agreement (or cufflinks.) I left all my stock and options behind and opened an independent firm. If greed is good, I guess fear can be great.

From the end of that chart above, until this year, that total number of employees has been almost exactly cut in half. Wall Street went from the coolest job a college kid could dream of, to apathy at best among young people. There is either confusion or distrust about even investing their first account with Wall Street, when they get any other job.

“It has become so popular, no one goes there anymore.” -Yogi Berra

A lot changed again.

Of the surviving investment banks/brokerage firms, none were humbled more than Goldman Sachs. Their arrogance cost them dearly. Leaked internal emails, ex-employees’ op-eds, and Congressional testimony - it is very safe to assume that there was a lot done wrong. There are more than 2 million Google results for “Goldman Sachs Evil.”

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The credit crisis was already the second 50% Stock Market crash in my brief career, at that point. My trading diary remains very clear on the subject: Stay Humble or the Market WILL Handle That for You. Goldman Sachs was unable to repeal the law of gravity for Wall Street’s ego inflated bubbles. Any trust that Marcus Goldman’s legacy had earned, on any of those side streets, was gone. His name was being stomped on, every day, for years.

“There are decades when nothing happens and there are weeks when decades happen.” -Vladimir Lenin

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Greed on Wall Street was not a surprise to many. But, when stories started showing up in popular Main Street publications, they spread from many, to ANYbody who read or paid attention at all, or overheard others who did.

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The most overwhelming consensus I have witnessed in my career, about any industry of any sector, was that Wall Street was not to be trusted.

“What everybody else knows is not worth knowing.” -Gerald Loeb

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All the crooked biases that led to so many willful blind eyes (on both sides of the table, and aisle) which created the credit crisis, were so exposed that investors have still not recovered.

Even after Warren Buffett bet on Goldman Sachs into the teeth of the credit crisis, all these cartoons and outrage came after his stake. Morgan Housel has my favorite description from Berkshire’s Annual Meeting (any year) “A great place to meet 40,000 self-described contrarians who all think exactly alike.”

So, what will change next?

Our vision is so blurred from wondering for so long what can go wrong next. This crowded agreement may be mis-pricing the potential of what might go right.

“Long-term investors must be careful not to learn too much from recent experience.” -Ben Graham

All the hate and headlines have melted away into something I find even more interesting – complete disinterest. The technology sector grabbed the bull’s baton once again, making any other sector look like a waste of time over the past decade, for plenty of good reasons. Startups are popping up in some of the most unusual locations and disrupting some of the longest-standing assumptions.

By pure chance, I met somebody last week who represented the landlord for one of these new ideas that caught my interest. He leaned back in his chair, feet on the table, and ordered a second Old Fashioned, as we visited in Park City, Utah. He sipped and smiled as we talked about the stunning growth from a new shop, not even three years old, that he rented space to on 111 Main Street in Salt Lake City.

The name of the startup is Marcus, which Goldman Sachs chose to honor its founder and his original idea and principles. After New York and London, Salt Lake City is now Goldman Sachs’ largest office. What is going on in there and its leader’s blue jeans could not possibly be any farther from Wall Street. I think it is no accident that the idea for Marcus was hatched at a family picnic table, by Goldman Sachs’ brain trust.

“A man travels the world over in search of what he needs and returns home to find it.” -George Moore

Their new Main Street location is another clue for broader changes underway. Richard Florida’s deep research on the “creative class” (think STEM plus other knowledge industries, like healthcare and education) is a profound peek around the corner to see where these bright minds are going. The city with the largest creative class growth since 2005, is Salt Lake City.

The demographics of the new smart money at Goldman Sachs might surprise you. Firmwide, more than two-thirds of its employees are now under the age of 35.

“The significant problems we face cannot be solved at the same level of thinking we were at when we created them.” -Albert Einstein

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Goldman Sachs is listening to customers again and adding new and younger ones. The idea for Marcus was to offer online personal savings accounts and loans. Rather than introduce another sophisticated product for a fraction of a fraction of a percentage of Americans, they interviewed 100,000 working class consumers on their “Pain Points.” Through Marcus, the minimum account size at Goldman Sachs is now $1.

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The Wall Street Journal once reported that a long-time CFO at Goldman Sachs kept a toaster oven in his office as a joke, and a reminder to never stoop to those low-brow gimmicks of small banks.

The throwback flexibility and service are just as shocking. Marcus allows families to choose payment dates for their loans, best suited to their cash flows. Live personal support is ready to help when needed. It looks like the potential for a complete turnaround, back in time. All that is missing is Marcus Goldman’s tall silk hat. His firm is crossing cultural boundaries once again, peddling up and down digital streets with this old-fashioned business idea.

“Bad companies are destroyed by crisis, good companies survive them, great companies are improved by them." -Andy Grove

The reason I became curious about Goldman Sachs was their willingness to change their playbook. Marcus is still a small piece of a giant pie. But Marcus Goldman must be smiling, knowing those little notes can add up. Simple relationships built on trust just might be scaling again.

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Marcus has been gathering $1 billion a month in deposits. As of June 2019, they had $48 billion in savings accounts and made $5 billion in personal loans. They have also discussed adding credit cards, mortgages, auto loans, and insurance to the menu. In just two and a half years, Marcus has more than four million new customers.

Rather than securitizing and repackaging the loans, Goldman Sachs is keeping them on the books. This back to the future simplicity will be a signature advantage against other fintech startups, which will have to find homes for the loans they create.

A lot is changing again.

We are getting absolutely no credit from anybody in the investing community yet,” said Goldman Sachs CEO David Solomon. “If we were out in Silicon Valley and made 20% of the progress that we’ve made, we would get a lot of credit and people would be throwing money at us to own the business. But nestled inside little old Goldman Sachs, we’re just going to have to prove it over time.”

Even among its peers in the unloved Financial Sector, Goldman Sachs has underperformed its sector over the past 1, 3, 5, and 10 years.

There is one non-investment firm out in Silicon Valley that likes what Marcus is doing. Here is a peek at another card up their sleeve of change.

In a remarkable turnaround, the early results of heading back to the street level for day to day needs that Marcus Goldman started serving, have been better than good. J.D. Power ranked Marcus #1 in customer service for consumer loans. There will be no cartoons or headlines made, unlike 10 years ago, to commemorate this very different kind of feedback.

“When I’m right no one remembers, when I’m wrong, no one forgets." -Doug Harvey, MLB Umpire

Stakeholders are noticing some changes.

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As always, this is nothing close to any recommendation. I like to scribble down thoughts (right and wrong) that are unfolding, because it forces me to read deeper and think harder. Research is even more important when I might need to change my mind.

“When you’re finished changing, you’re finished.” -Ben Franklin

@RyanKruegerROI

Sources: “Our Crowd” Stephen Birmingham / “When Money Was in Fashion” June Breton Fisher / “The Partnership: The Making of Goldman Sachs” Charles Ellis