Martin chavez goldman sachs net worth

Goldman Sachs’ Digital Journey
In early 2017, Lloyd Blankfein, Chairman and Chief Executive Officer of Goldman Sachs, was continuing to steer the company in a new direction. Blankfein proclaimed, “We are a technology firm. We are a platform,”1 and led a series of initiatives to translate this vision into reality. In 2013, Goldman started offering its clients access to its in-house data, analytics, and risk-management tools through a technology platform named Marquee. This allowed clients to integrate high-value proprietary data and applications into their own systems, but retain the flexibility to make purchases with a competing firm.2 This prompted many in the industry to wonder why Goldman was giving away its “secret sauce.”3

One of the applications on the Marquee platform was the Structured Investment Marketplace and Online Network, known as SIMON, which enabled clients to create and buy structured notesa online in denominations as low as $1,000. SIMON predominantly served smaller clients, including independent and regional brokers and private wealth managers, not Goldman Sachs’ typical institutional client. In 2016, Goldman opened SIMON to competitors, which gave clients the option to buy securities direct from Goldman Sachs or from a number of additional issuers, including Wells Fargo, CIBC, and TD Bank Group.

For Goldman Sachs, one of the world’s leading investment banking, securities, and investment management firms, known for personalized service to its sophisticated institutional clients, what did the Marquee platform say about the direction of the firm? Would giving clients access to internal systems dilute Goldman Sachs’ competitive advantage, and what was the logic behind giving competitors a seat at the table?

Company Background
In 1869, Marcus Goldman, an immigrant from Bavaria, opened a banking business, “M. Goldman, Banker and Broker,”4 in New York that provided short-term capital to small-business borrowers.5 Goldman connected small-business owners with investors willing to buy out their promissory notes and took a fee for his services. These short-term unsecured corporate loans later became known as commercial paper. To handle the growing demand for his business, Goldman hired his son-in-law,

a A structured note consists of two components—a bond and a derivative. The bond component provides principal protection and the derivative portion adjusts its risk/return profile.

Professor Sunil Gupta and Research Associate Sara Simonds prepared this case with the assistance of Senior Case Researcher David Lane. It was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright © 2017, 2019 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

Samuel Sachs, in 1882, and three years later formed Goldman, Sachs, & Co.6 At the turn of the century, the renamed firm branched into new business lines, including foreign exchange and currency services, joining the NYSE in 1896, and advising corporate clients such as Sears & Roebuck. 7

Goldman Sachs continued to grow and expand its services, and by 1920 the firm managed initial public offerings for Sears, B.F. Goodrich, and Merck.8 In the 1930s, Goldman entered the securities and trading business, which grew alongside investment banking services and over time became the organization’s second primary business. The firm expanded internationally in the 1970s and added private wealth management services and a fixed-income sales and trading division. In 1981, through the acquisition of J. Aron & Company, Goldman secured a presence in commodities trading and created a merged division for Fixed Income, Currency, and Commodity (FICC) sales, trading, and analytics.9

After decades of internal debate, Goldman went public in 1999 and raised $3.7 billion from the sale of 12.5% of the company’s shares.10 At that time, Goldman reported net revenues of $13.3 billion.11 After its IPO, the firm continued to grow rapidly and in 2007 boasted record revenues of $45.9 billion, up 81% from 2005 and 246% from 1999.12,13 While all business segments grew, the Equity and FICC divisions experienced a meteoric rise, growing from $14.6 billion in 2005 to $27.5 billion in 2007.14 A significant driver of this growth was mortgage-backed securities (MBS), the bundling of mortgages for sale as an investment.

In addition to originating and trading MBS, Goldman and its competitors also bought and held MBS, increasing their risk exposure to the U.S. residential marketplace—risk that the firm hedged by short-selling MBS and investing in default insurance (credit default swaps). Goldman benefited from its long positions as the MBS market grew through the first half of 2007. When the mortgage market faltered thereafter, the firm suffered losses on the MBS they owned but generated large profits from its shorts and credit default swaps. This attracted increased attention into Goldman’s earnings results.

Catalysts for Change
The Financial Crisis of 2008
A number of convergent market factors led to the financial crisis of 2008. Record-low interest rates during 2001–2004, followed by monetary tightening in 2005 and 2006,15 rapid growth of a loosely regulated subprime lending market, a sharp rise in home prices, and a proliferation in the number and complexity of securities that were backed by, or linked to, the value of mortgages were all contributing causes.16 These factors may have been exacerbated by a decrease in regulation and oversight, including the repeal of the Glass-Steagall Act (which had supported the separation of commercial banks from investment banks), and a decrease in the amount of capital banks were required to hold.17

The crisis quickly spiraled out of control and spread across the globe, affecting not only mortgage lenders and investors, but also issuers and insurers of MBS and related products and institutions that relied on short-term interbank lending. This led to an unprecedented number of corporate bankruptcies and distressed sales. To stabilize the markets, governments and central banks took drastic measures, such as injecting capital, purchasing toxic assets, cutting interest rates, and brokering the sale of insolvent banks.18

The Impact of Regulation and Macroeconomic Forces
In the aftermath of the financial crisis, the U.S. government and international organizations created new industry regulations and strengthened existing rules to avoid future systemic financial crises. In

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July 2010, President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, and international regulators introduced an expanded set of reforms through Basel III.19,20 The Volcker Rule, part of the Dodd-Frank Act, now prohibited proprietary trading. Capital and liquidity requirements were much stricter, and regulation dramatically changed the derivatives market.21 As a condition of receiving financial assistance from the U.S government during the financial crisis, Goldman changed its structure from an investment bank to a bank holding company, which also brought additional regulation and cost.

In addition to recovering from the financial crisis, Goldman also had to contend with a global economic downturn and badly damaged financial system, which resulted in volatile markets and lower projected growth. Central bank monetary policy also held interest rates near zero, further curtailing profits.22

Regulatory changes, along with the challenging operating environment, contributed to a sharp reduction in revenue and earnings for Goldman Sachs and its peers. In 2008, Goldman posted its lowest net earnings since 1998.23 In 2009, the firm rebounded to near 2007-level net revenue, but 2010 net revenue and pre-tax earnings dropped 15% and 27%, respectively, from 2007 levels. Results in 2011 were even more concerning, with net revenue down 37% and pre-tax earnings down a whopping 65% compared to 2007 (see Exhibit 1 for 2007–2016 net revenues and pre-tax earnings by business segment).24

Technology in the Financial Sector
Technology had always played a significant role in the financial services sector, and it had been key to making Goldman and the broader industry more transparent and better at managing risk. Using large-scale data to analyze and hedge risk in real time had become the norm on Wall Street. Data and algorithm-driven “quants,” rather than traders who relied on their instincts, became far more valuable in the industry.

The pace of technology’s impact on the financial industry accelerated even further after the financial crisis. The proliferation of cloud platforms, open source software, and application program interfaces (APIs) drastically reduced the time and cost to build technology. Commenting on this change, R. Martin Chavez, Chief Financial Officer and former Chief Information Officer of Goldman, said:

It used to take $50 million to bring any enterprise software company from inception to breakeven. However, beginning in 2008, the $50 million price tag began to drop precipitously. The figure is now more like $3 million dollars.25

This paradigm shift significantly enhanced Goldman’s ability to develop and integrate technology, but also led to the rise of new competitors in financial technology (fintech). Annual global venture capital investments in fintech grew a staggering 17 times from $930 million in 2008 to $17.4 billion in 2016.26,27 Some of the highly valued fintech companies included: lending companies, such as Lending Club, Prosper, SoFi, Funding Circle, and Kabbage; payment companies, such as PayPal, Square, Stripe, and Klarna; personal finance and investment companies, including Credit Karma, Envestnet, and Betterment; and funding companies, such as Kickstarter and GoFundMe.28

Impact of technology Recognizing the opportunity for Goldman, senior leadership worked hard to incorporate and leverage digital technology. Two examples of Goldman’s technology-driven innovation were the creation of a hybrid cloud platform using open standards and APIs; and a “data lake” that Chavez described as “a single firm-wide data repository to generate new insights for clients, on top of which we can conduct machine learning.”29

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Reflecting on the competitive challenge posed by the growing fintech industry, Darren Cohen, the Global Head of Goldman’s Principal Strategic Investments (PSI) group, which led the firm’s strategic investments in financial technology, said:

For the most part, Goldman Sachs’ Securities Division, which operates at the center of global financial markets and serves institutional clients, does not face a direct threat from the explosion of fintech companies. Risk intermediation is highly regulated, and successful firms need a large balance sheet, major investment in infrastructure, and a substantial, often global, footprint. These requirements make it difficult for new entrants in the market, which are insurmountable for young fintech companies. This dynamic is why fintech companies have largely focused on less complex segments of the marketplace, such as consumer lending, digital payments, personal finance, and wealth management.

Chavez agreed: “The fintech industry is super interesting and innovative, and we are participating as investors and as clients. However, there is still a critical need for regulated banks.”30 Chavez and Cohen recognized that embracing advancements in technology were a necessary part of the firm’s and the industry’s evolution. Integrating technology was both an inevitability and an opportunity for Goldman, and the firm understood that the approach it chose would have far-reaching implications for the future of the organization.

The Goldman Sachs Strategy
With downward pressure on revenue and earnings, Goldman executives recognized the need to reduce expenses through operational efficiency, strengthen their core businesses, and position the firm to capitalize on new business opportunities.

Chavez was a critical figure in designing and implementing Goldman’s digital strategy. Known to his colleagues as Marty, Chavez offered Goldman a unique combination of skills and experience honed in both the technology and financial services industries. After receiving a Master’s degree in Computer Science from Harvard and a PhD from Stanford, Chavez began his career in Silicon Valley and in 1989 cofounded Quorum Software Systems. He joined Goldman’s Currency and Commodities group in 1993 and helped build the firm-wide risk analytics system known as Securities Database, or SecDB, which remained a key competitive asset for the firm in 2017.31 Chavez left Goldman in 1997 for Credit Suisse and then returned to Silicon Valley where he launched KioDex, Inc. In 2004, he sold KioDex and returned to Goldman as a Managing Director in the Investment Banking Division, then went on to become the Global Co-Head of Securities Division Strats and then Global Co-Chief Operating Officer of the Equities business. In 2013 he was named the firm’s first Chief Information Officer, and in May 2017 he became Goldman’s CFO.

With the support of the Management Committee, Goldman Sachs’ senior leadership, Chavez and his team created a technology strategy for modernizing the firm that started with a focus on internal efficiencies and included the creation of both internal and external platforms.

Creating Internal Efficiencies
Gaining efficiencies through technology was not a new concept for Goldman. In the early 2000s, the firm began to automate its U.S. cash equity trading desk, which led to a dramatic shift in the number and responsibilities of its personnel, from 600 equities exchange floor traders in 2000 to two traders and hundreds of computer engineers in 2017.32 Brian Levine, Co-Head of Global Equities Trading and Execution Services, and Adam Korn, Global Co-Head of Securities Systematic Solutions, explained:

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Cash equities was the first business to start moving electronic, not just at Goldman Sachs but across the industry. We were among the first banks to realize that not only execution but also all internal workflow could be automated.

Chavez and his team accelerated this process by centralizing core components of work and removing duplication. Ezra Nahum, Global Head of Fixed Income, Currencies, and Commodities (FICC) Strategists in the Securities Division, highlighted an example of this process:

FICC is comprised of seven different businesses—interest rates, foreign exchange, emerging markets, mortgages, flow credit, structured credit, and commodities. We used to operate in silos, where each of those businesses was run as a unit. We began to ask ourselves “Is there a common denominator that’s reasonably large and can benefit all seven businesses?” We still need product experts in each business, but maybe they can work from a common technological platform. So instead of having seven separate and distinct teams, we have seven smaller teams focused on what is unique to each business and one bigger team underneath.

However, this process required significant alignment from business units that were responsible for their own profitability and therefore prized their autonomy. Cohen highlighted the challenges:

To get seven businesses to make the short-term sacrifice necessary to get standard- ization right takes discipline within the firm. Costs of developing these platforms are allocated back to the businesses so the short-term pain is real. The vision is one thing, but the real edge is getting the organization to break down the barriers to operate in a digital world and overcome traditionally deep vertical barriers.

Korn elaborated on some of the difficult questions the firm grappled with:

Our shift from financial products to applications is organizationally complex to manage. What business are the people building these applications aligned with? It’s easy for product-specific applications, but if I am building analytics for the entire firm, where do I sit in the organization? How do I get paid? How do I know what value is being generated? These are very complicated issues.

Strengthening the Core
As Goldman developed its technology platform for internal purposes, the firm saw an opportunity to offer direct access to its internal tools to a select group of institutional clients. Chavez explained the impetus:

Imagine if Google were closed and proprietary. You would call your Google sales representative to do a search, they would come back with results, and then you would call them back to refine or redo the search. This is how our business was done—we would go back and forth with our clients on the phone until they were satisfied with the product we developed for them. Why not give them direct access to our platform and our tools?

Chavez had this vision in mind when he built the platform for internal use. The system was developed with application program interfaces (APIs) that could be accessed by internal business units or external clients. The platform was christened Marquee, a play on the first name of Chavez, its architect and champion. Its suite of applications grew to incorporate tools that facilitated risk analytics, portfolio construction, market data and research, sales, trading, and post-trade tracking (see Exhibit 2). Each application was first designed to meet an internal need, which allowed for an iterative development process and exhaustive testing. Although originally built for internal use, all applications were

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designed and developed to be self-contained and were therefore easily integrated, both internally and externally. This discipline provided Goldman the option to open applications to clients, if and when the opportunity was ripe.

The Marquee suite of applications was built on top of SecDB, a powerful analytics database that tracked and managed risk, and represented “twenty-five years of continuous innovation”33 at Goldman. It calculated 23 billion prices daily across 2.8 million positions and 500,000 market scenarios. SecDB helped Goldman and its clients price securities, analyze potential trades, and monitor risk.34 One of the first Marquee applications was StrategyStudio, a portfolio construction tool that Gary Cohn, President of Goldman Sachs in 2015, described as follows: “StrategyStudio allows clients to quickly build and analyze a custom investment strategy using indices and [Goldman Sachs] baskets across both equities and fixed income. The tool also provides back-testing, and advanced capabilities to monitor and manage portfolios on a daily basis.”35

By making applications available to clients, Goldman hoped to claim valuable space on clients’ desktops and enhance customer dialogue that would position the firm as a preferred partner for trade execution and other transactions. Tighter integration with clients also had the benefit of creating a potential competitive advantage. However, many saw this as a risky strategy. “Some outsiders and Goldman alumni question whether the firm will win enough client business to justify sharing more of its analytics with clients,” reported a Wall Street Journal article.36 They wondered if clients would use Goldman’s tools to do the analysis for free and execute those trades with a competitor. SecDB had been a source of substantial competitive advantage for Goldman, and the firm viewed it as a highly valuable asset. The Wall Street Journal quoted a source as saying Goldman had rebuffed an offer of $1 billion to license the database, contemplating its value to be closer to $5 billion.37

Commenting on the concern that clients might do the analysis on Goldman’s platform for free and trade elsewhere, Paul Russo, Global Co-Chief Operating Officer of the Equities Franchise, said, “Advice was always free. Clients paid for a bundle of services that included research and execution.” Russo added, “If we don’t cannibalize ourselves, someone else will.” New regulations were also pointing towards the unbundling of research and execution. To create transparency and avoid conflict of interest, Europe was planning to introduce new regulation in 2018, Markets in Financial Instruments Directive (MiFID II), which would require firms to unbundle research and execution. Cohen wondered if this provided an opportunity for Goldman to consider a subscription model for its research and analytical services.

Extending the Core
In addition to leveraging technology to create internal efficiencies and to strengthen its core business with existing clients, Goldman also pursued new lines of business and new customer groups.

SIMON Part of the Marquee suite of applications, the Structured Investment Marketplace and Online Network (SIMON) was designed to help clients build and purchase structured notes, which were highly customized risk-return products. Structured notes were popular in Europe but had limited penetration in the U.S. due to a highly fragmented market of broker-dealers and investment advisers who were unfamiliar with the product. Jason Broder, Head of the Private Investor Products Group, described why this provided a unique opportunity to Goldman:

Penetration of structured investments in the high-net-worth client channel, i.e., Goldman’s Private Wealth Management business, is about 5% to 10%. But if you go downstream in the broker-dealer channel, the penetration is probably 0.25%, not just for

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Goldman, but for every issuer. Yet the assets under supervision in this channel are on the order of $6 trillion.

SIMON was built with these new target customers in mind. It provided a web-based, easy-to-use, end-to-end marketplace for structured notes that focused heavily on product education, risk assessment, and oversight (see Exhibits 3, 4, and 5). Russo summarized the benefit of SIMON: “Instead of making ten calls to us as they did before, clients can do scenario analysis of maturity and cost by issuer and get the information they want themselves, like Google. By giving clients access on their desktop, we massively decrease the sales cycle.” In 2015, the first year of SIMON’s operation, Goldman attracted thousands of advisors from 18 brokerage firms, representing client assets close to $2 trillion.38

Without a retail sales force, Goldman had historically been unable to reach smaller broker-dealers and non-Goldman investment advisers. By creating the SIMON online marketplace, Goldman not only created the ability for its clients to create, analyze, and buy structured notes electronically, but it also built a channel through which it could reach an entirely new customer base.

Opening SIMON to competitors In 2016, Goldman made the bold move to open SIMON to competitors, allowing SIMON users to buy structured notes not only from Goldman Sachs, but also from rivals such as Wells Fargo, CIBC, and TD Bank Group. Adding competitors to SIMON, thereby allowing outsiders access to its customer base, represented an interesting shift in Goldman’s strategy.

Two key factors influenced Goldman’s decision to move to a multi-seller platform: reach and variety of offerings. Russo explained, “We realized that growth of the single dealer model had reached capacity. To continue to grow we need to add more issuers. Clients also like competition. Having multiple issuers allows clients to mix and match credit risk against payoffs effectively.” Cohen agreed: “We can compete by making the pie bigger.”

Moving to a multi-seller platform resulted in a significant increase in customers and trade value. During 2016, the number of SIMON users jumped nearly 500%, from 2,400 users to 15,000 users at 43 brokerages. There were thousands of active users on the platform each month, and trade value increased by over 300% from 2015. As a result, Goldman’s structured note sales increased fourfold from 2013 to 2016.

Organizing for Change
Two groups at Goldman were instrumental in implementing its firm-wide technology strategy: The Principal Strategic Investments Group and the Digital Strategies Group.

Principal Strategic Investments (PSI) Group In 2000, the PSI group was launched with the dual goals of leveraging technology to shape and build market infrastructure for Goldman’s core businesses and managing the firm’s $1 billion strategic investment portfolio. In 2017, PSI was led by Darren Cohen and consisted of 30 employees, sourced from different functional areas across the firm (including sales, trading, technology, operations, and investing) and through its network in major technology hubs, such as California, London, New York City, and Israel. The breadth and depth of experience within PSI equipped the team to work effectively with individual business divisions and to make targeted investments.

PSI worked closely with the Securities Division, one of the key revenue generating divisions of the firm and heavy consumer of technology, as well as with the Technology, Operations, and Consumer & Commercial Banking divisions, and in an informal role with the Investment Banking and Investment Research Divisions. Goldman chose to embed PSI in the business divisions, as opposed to an executive

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team that existed outside of the functional groups, to stay close to business needs and to foster a collaborative working relationship. PSI played a consultative role, helping domain specialists to define and document business needs and build implementation plans, which, if viable, would lead to firm investment.

The group created a consistent process and investing discipline that was implemented across the firm, but worked hard to stay close to each business unit. Cohen described the process as a “deeply matrixed and integrated web of relationships and credibility.” The investment of time was key to develop trust between PSI and the business owners, particularly in the face of the “natural tensions” that arose from competing investment timelines, such as trading desks looking for short-term P&L impact while PSI focused on longer-term strategic impact. Since its inception, PSI had worked in concert with many different asset classes, including equities, interest rates, commodities, credit, and foreign exchange, which led to a centralized bank of institutional knowledge on digital transitions within the Securities Division.

In its strategic investment management role, PSI acted “partly as a venture capital” group as well as worked with domain experts across the firm to shape the product offerings at existing companies. The group focused almost exclusively on technology relevant to Goldman’s core businesses, which Cohen described as “including minority investments in exchanges, trading technology, data analytics, fintech, enterprise technology, and spinning out our technology platforms.”

PSI’s performance was measured against two benchmarks—a qualitative measure of its strategic impact on individual divisions and the firm, and a quantitative measure of its return on portfolio. In early 2017, the PSI portfolio consisted of approximately $1 billion in investments in a variety of companies (Exhibit 6 shows select portfolio companies).

Digital Strategies Group (DSG) In 2016, Goldman created DSG, a complementary cross- functional group, to coordinate digital strategy across businesses and oversee implementation across the Securities Division. While PSI concentrated mostly on enhancing individual business units and managing the external investment portfolio, DSG focused more on internal coordination across the division, in which asset classes historically operated very independently. This initiative had strong support from senior management at the firm. A June 2016 internal memo introduced the group:

Over the last several years, we are conducting more of our workflow, and delivering more solutions, content, and liquidity to our clients, on digital platforms. The significant growth of tools and applications across businesses within Equities and FICC requires a broad, comprehensive approach to manage resources, reduce redundancies, streamline the client experience, and achieve technological scale for the Securities Division.

We are pleased to announce the creation of the Digital Strategy Group (DSG), a cross- functional team that will develop a unified digital strategy for the [Securities] Division.

The DSG will work with the Franchise Desktop Group (FDG) to automate and enhance franchise workflows through ongoing investments in Customer Relationship Manage- ment (CRM), data analytics, internal web apps, bots, and Symphony. In addition, the DSG will oversee our Marquee initiatives by approving business plans, reviewing product roadmaps, aligning resources, measuring progress, and coordinating our go-to-market strategy.

As part of this effort, we have asked Principal Strategic Investments (PSI) to collaborate with our businesses to develop plans for our major internal and external digital initiatives.

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As our digital initiatives expand, the DSG will enable us to make globally coordinated, cross-product, timely decisions on the strategy, resourcing, implementation, and marketing of our digital offering.

Venturing into Retail Banking: GS Bank and Marcus
During the financial crisis, Goldman became a bank holding company, which gave it the ability to sell to retail customers. In 2016, Goldman took advantage of this option and launched GS Bank, its online savings bank for retail consumers, which offered customers significantly higher interest rates (1.20% annual percent yield on deposits at GS Bank compared to 0.01% at most major banks) and no minimum deposit.39 A few months later, it launched Marcus, an online lending platform offering personal loans to consumers. Consumer deposits at GS Bank provided Goldman with lower cost capital than its traditional funding sources, and Marcus leveraged the firm’s experience with managing risk and provided another outlet for its balance sheet. In a press release announcing the launch, Goldman Sachs described Marcus:

Named after Marcus Goldman, one of the firm’s founders, Marcus by Goldman Sachs is a new business that benefits from the firm’s 147-year history of financial expertise, risk management and customer service. Marcus provides consumers with a transparent and simple approach to consolidate their high-interest credit card debt. At Marcus.com, credit- worthy borrowers can apply for fixed-rate, no-fee personal loans of up to $30,000 for periods of two to six years.40

Blankfein described Goldman’s entry into consumer lending as, “One of the places which historically we haven’t done as much of, being an investment bank, and so what we are doing is we are building lending platforms and lending businesses.”41 Chavez elaborated on the rationale behind GS Bank and Marcus:

Intense regulatory oversight led us to become a bank holding company, so we started exploring its potential benefits. We have always been in wholesale and did not know anything about retail business. But we know risk management, we have a strong balance sheet, and we are good in technology. Lending is a service that involves risk management and can be delivered digitally. Using APIs and automated processes, we were able to launch it within a year.

Through Marcus, Goldman was reaching retail consumers directly, a big departure from its focus on institutional or even high-net-worth investors. The personal lending space was crowded with competitors, ranging from large banks, such as CitiBank, JP Morgan Chase, Bank of America, and Wells Fargo, to fintech start-ups, such as LendingClub, Prosper, and SoFi. This led to intense competition and high customer acquisition costs.

By April 2017, GS Bank had $115 billion in deposits, making it one of the top 25 banks in the U.S. However, the online lending market remained small, with only $40 billion of credit extended over a decade.42

Conclusion
We are not in the business of predicting the future. Instead we do a lot of contingency planning.

— R. Martin Chavez, CFO and former CIO of Goldman Sachs

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Change was in the air at Goldman Sachs. A combination of catalysts, including regulation and advances in technology, were driving the firm to adapt and innovate. The number and seniority of engineers at Goldman Sachs reflected the firm’s commitment to this effort.b The post-2008 reality was forcing Goldman Sachs and its competitors to reassess where to play and how to compete. Glimpses into Goldman Sachs’ strategy were evident through initiatives like Marquee and Marcus, but how did these and other recent initiatives fit into the firm’s overall business model? Was Goldman Sachs’ core business changing, or were products like SIMON and Marcus on the periphery? What was driving the firm to open up access to internal tools that had long been seen as a proprietary competitive advantage, and how could it justify inviting competitors to sell to its clients? Was the longstanding focus on institutional clients giving way to greater emphasis on retail clients and services? And what did it mean for the future of the banking industry?

b In 2017, 9,000 employees, approximately one-quarter of Goldman’s staff, had an engineering background and 37% of the 2016 analyst class had STEM (science, technology, engineering, or mathematics) degrees.

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Exhibit 1 Goldman Sachs Net Revenue and Pre-Tax Earnings, 2007–2016

Source: Compiled from SEC filings data, accessed April 2017.

Notes: Before 2010, Goldman Sachs reported its business in three segments: Investment Banking, Trading and Principal Investments, and Asset Management and Securities Services. In 2010, Goldman split Trading and Principal Investments into two business segments: Institutional Client Services and Investing & Lending. FY 2008 and FY 2009 data are restated.

Total pre-tax earnings do not equal sum of business segments due to firm expenses not allocated to a business segment. Goldman Sachs’ Business Segments:

· Investment Banking advised clients on mergers and restructuring, as well as assisted companies in raising money through equity offerings and debt issuance.

· Institutional Client Services was a liquidity provider (bought and sold securities, earning revenue on the spread) for a range of asset classes for institutional clients. It also offered research, lending, and financing services.

· Investing & Lending invested Goldman’s capital in debt and equity securities, loans, and real estate entities, and provided funding for clients by originating loans.

· Investment Management managed investments and offered investment products for a diverse range of institutional and individual clients.

o Compiled from: “Who We Are: At a Glance,” Goldman Sachs, n.d., http://www.goldmansachs.com/who-we-are/at-a-glance/, accessed May 2017.

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Exhibit 2 Marquee Tools
Goldman Sachs’ Digital Journey
In early 2017, Lloyd Blankfein, Chairman and Chief Executive Officer of Goldman Sachs, was continuing to steer the company in a new direction. Blankfein proclaimed, “We are a technology firm. We are a platform,”1 and led a series of initiatives to translate this vision into reality. In 2013, Goldman started offering its clients access to its in-house data, analytics, and risk-management tools through a technology platform named Marquee. This allowed clients to integrate high-value proprietary data and applications into their own systems, but retain the flexibility to make purchases with a competing firm.2 This prompted many in the industry to wonder why Goldman was giving away its “secret sauce.”3

One of the applications on the Marquee platform was the Structured Investment Marketplace and Online Network, known as SIMON, which enabled clients to create and buy structured notesa online in denominations as low as $1,000. SIMON predominantly served smaller clients, including independent and regional brokers and private wealth managers, not Goldman Sachs’ typical institutional client. In 2016, Goldman opened SIMON to competitors, which gave clients the option to buy securities direct from Goldman Sachs or from a number of additional issuers, including Wells Fargo, CIBC, and TD Bank Group.

For Goldman Sachs, one of the world’s leading investment banking, securities, and investment management firms, known for personalized service to its sophisticated institutional clients, what did the Marquee platform say about the direction of the firm? Would giving clients access to internal systems dilute Goldman Sachs’ competitive advantage, and what was the logic behind giving competitors a seat at the table?

Company Background
In 1869, Marcus Goldman, an immigrant from Bavaria, opened a banking business, “M. Goldman, Banker and Broker,”4 in New York that provided short-term capital to small-business borrowers.5 Goldman connected small-business owners with investors willing to buy out their promissory notes and took a fee for his services. These short-term unsecured corporate loans later became known as commercial paper. To handle the growing demand for his business, Goldman hired his son-in-law,

a A structured note consists of two components—a bond and a derivative. The bond component provides principal protection and the derivative portion adjusts its risk/return profile.

Professor Sunil Gupta and Research Associate Sara Simonds prepared this case with the assistance of Senior Case Researcher David Lane. It was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright © 2017, 2019 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

Samuel Sachs, in 1882, and three years later formed Goldman, Sachs, & Co.6 At the turn of the century, the renamed firm branched into new business lines, including foreign exchange and currency services, joining the NYSE in 1896, and advising corporate clients such as Sears & Roebuck. 7

Goldman Sachs continued to grow and expand its services, and by 1920 the firm managed initial public offerings for Sears, B.F. Goodrich, and Merck.8 In the 1930s, Goldman entered the securities and trading business, which grew alongside investment banking services and over time became the organization’s second primary business. The firm expanded internationally in the 1970s and added private wealth management services and a fixed-income sales and trading division. In 1981, through the acquisition of J. Aron & Company, Goldman secured a presence in commodities trading and created a merged division for Fixed Income, Currency, and Commodity (FICC) sales, trading, and analytics.9

After decades of internal debate, Goldman went public in 1999 and raised $3.7 billion from the sale of 12.5% of the company’s shares.10 At that time, Goldman reported net revenues of $13.3 billion.11 After its IPO, the firm continued to grow rapidly and in 2007 boasted record revenues of $45.9 billion, up 81% from 2005 and 246% from 1999.12,13 While all business segments grew, the Equity and FICC divisions experienced a meteoric rise, growing from $14.6 billion in 2005 to $27.5 billion in 2007.14 A significant driver of this growth was mortgage-backed securities (MBS), the bundling of mortgages for sale as an investment.

In addition to originating and trading MBS, Goldman and its competitors also bought and held MBS, increasing their risk exposure to the U.S. residential marketplace—risk that the firm hedged by short-selling MBS and investing in default insurance (credit default swaps). Goldman benefited from its long positions as the MBS market grew through the first half of 2007. When the mortgage market faltered thereafter, the firm suffered losses on the MBS they owned but generated large profits from its shorts and credit default swaps. This attracted increased attention into Goldman’s earnings results.

Catalysts for Change
The Financial Crisis of 2008
A number of convergent market factors led to the financial crisis of 2008. Record-low interest rates during 2001–2004, followed by monetary tightening in 2005 and 2006,15 rapid growth of a loosely regulated subprime lending market, a sharp rise in home prices, and a proliferation in the number and complexity of securities that were backed by, or linked to, the value of mortgages were all contributing causes.16 These factors may have been exacerbated by a decrease in regulation and oversight, including the repeal of the Glass-Steagall Act (which had supported the separation of commercial banks from investment banks), and a decrease in the amount of capital banks were required to hold.17

The crisis quickly spiraled out of control and spread across the globe, affecting not only mortgage lenders and investors, but also issuers and insurers of MBS and related products and institutions that relied on short-term interbank lending. This led to an unprecedented number of corporate bankruptcies and distressed sales. To stabilize the markets, governments and central banks took drastic measures, such as injecting capital, purchasing toxic assets, cutting interest rates, and brokering the sale of insolvent banks.18

The Impact of Regulation and Macroeconomic Forces
In the aftermath of the financial crisis, the U.S. government and international organizations created new industry regulations and strengthened existing rules to avoid future systemic financial crises. In

2

July 2010, President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, and international regulators introduced an expanded set of reforms through Basel III.19,20 The Volcker Rule, part of the Dodd-Frank Act, now prohibited proprietary trading. Capital and liquidity requirements were much stricter, and regulation dramatically changed the derivatives market.21 As a condition of receiving financial assistance from the U.S government during the financial crisis, Goldman changed its structure from an investment bank to a bank holding company, which also brought additional regulation and cost.

In addition to recovering from the financial crisis, Goldman also had to contend with a global economic downturn and badly damaged financial system, which resulted in volatile markets and lower projected growth. Central bank monetary policy also held interest rates near zero, further curtailing profits.22

Regulatory changes, along with the challenging operating environment, contributed to a sharp reduction in revenue and earnings for Goldman Sachs and its peers. In 2008, Goldman posted its lowest net earnings since 1998.23 In 2009, the firm rebounded to near 2007-level net revenue, but 2010 net revenue and pre-tax earnings dropped 15% and 27%, respectively, from 2007 levels. Results in 2011 were even more concerning, with net revenue down 37% and pre-tax earnings down a whopping 65% compared to 2007 (see Exhibit 1 for 2007–2016 net revenues and pre-tax earnings by business segment).24

Technology in the Financial Sector
Technology had always played a significant role in the financial services sector, and it had been key to making Goldman and the broader industry more transparent and better at managing risk. Using large-scale data to analyze and hedge risk in real time had become the norm on Wall Street. Data and algorithm-driven “quants,” rather than traders who relied on their instincts, became far more valuable in the industry.

The pace of technology’s impact on the financial industry accelerated even further after the financial crisis. The proliferation of cloud platforms, open source software, and application program interfaces (APIs) drastically reduced the time and cost to build technology. Commenting on this change, R. Martin Chavez, Chief Financial Officer and former Chief Information Officer of Goldman, said:

It used to take $50 million to bring any enterprise software company from inception to breakeven. However, beginning in 2008, the $50 million price tag began to drop precipitously. The figure is now more like $3 million dollars.25

This paradigm shift significantly enhanced Goldman’s ability to develop and integrate technology, but also led to the rise of new competitors in financial technology (fintech). Annual global venture capital investments in fintech grew a staggering 17 times from $930 million in 2008 to $17.4 billion in 2016.26,27 Some of the highly valued fintech companies included: lending companies, such as Lending Club, Prosper, SoFi, Funding Circle, and Kabbage; payment companies, such as PayPal, Square, Stripe, and Klarna; personal finance and investment companies, including Credit Karma, Envestnet, and Betterment; and funding companies, such as Kickstarter and GoFundMe.28

Impact of technology Recognizing the opportunity for Goldman, senior leadership worked hard to incorporate and leverage digital technology. Two examples of Goldman’s technology-driven innovation were the creation of a hybrid cloud platform using open standards and APIs; and a “data lake” that Chavez described as “a single firm-wide data repository to generate new insights for clients, on top of which we can conduct machine learning.”29

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Reflecting on the competitive challenge posed by the growing fintech industry, Darren Cohen, the Global Head of Goldman’s Principal Strategic Investments (PSI) group, which led the firm’s strategic investments in financial technology, said:

For the most part, Goldman Sachs’ Securities Division, which operates at the center of global financial markets and serves institutional clients, does not face a direct threat from the explosion of fintech companies. Risk intermediation is highly regulated, and successful firms need a large balance sheet, major investment in infrastructure, and a substantial, often global, footprint. These requirements make it difficult for new entrants in the market, which are insurmountable for young fintech companies. This dynamic is why fintech companies have largely focused on less complex segments of the marketplace, such as consumer lending, digital payments, personal finance, and wealth management.

Chavez agreed: “The fintech industry is super interesting and innovative, and we are participating as investors and as clients. However, there is still a critical need for regulated banks.”30 Chavez and Cohen recognized that embracing advancements in technology were a necessary part of the firm’s and the industry’s evolution. Integrating technology was both an inevitability and an opportunity for Goldman, and the firm understood that the approach it chose would have far-reaching implications for the future of the organization.

The Goldman Sachs Strategy
With downward pressure on revenue and earnings, Goldman executives recognized the need to reduce expenses through operational efficiency, strengthen their core businesses, and position the firm to capitalize on new business opportunities.

Chavez was a critical figure in designing and implementing Goldman’s digital strategy. Known to his colleagues as Marty, Chavez offered Goldman a unique combination of skills and experience honed in both the technology and financial services industries. After receiving a Master’s degree in Computer Science from Harvard and a PhD from Stanford, Chavez began his career in Silicon Valley and in 1989 cofounded Quorum Software Systems. He joined Goldman’s Currency and Commodities group in 1993 and helped build the firm-wide risk analytics system known as Securities Database, or SecDB, which remained a key competitive asset for the firm in 2017.31 Chavez left Goldman in 1997 for Credit Suisse and then returned to Silicon Valley where he launched KioDex, Inc. In 2004, he sold KioDex and returned to Goldman as a Managing Director in the Investment Banking Division, then went on to become the Global Co-Head of Securities Division Strats and then Global Co-Chief Operating Officer of the Equities business. In 2013 he was named the firm’s first Chief Information Officer, and in May 2017 he became Goldman’s CFO.

With the support of the Management Committee, Goldman Sachs’ senior leadership, Chavez and his team created a technology strategy for modernizing the firm that started with a focus on internal efficiencies and included the creation of both internal and external platforms.

Creating Internal Efficiencies
Gaining efficiencies through technology was not a new concept for Goldman. In the early 2000s, the firm began to automate its U.S. cash equity trading desk, which led to a dramatic shift in the number and responsibilities of its personnel, from 600 equities exchange floor traders in 2000 to two traders and hundreds of computer engineers in 2017.32 Brian Levine, Co-Head of Global Equities Trading and Execution Services, and Adam Korn, Global Co-Head of Securities Systematic Solutions, explained:

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Cash equities was the first business to start moving electronic, not just at Goldman Sachs but across the industry. We were among the first banks to realize that not only execution but also all internal workflow could be automated.

Chavez and his team accelerated this process by centralizing core components of work and removing duplication. Ezra Nahum, Global Head of Fixed Income, Currencies, and Commodities (FICC) Strategists in the Securities Division, highlighted an example of this process:

FICC is comprised of seven different businesses—interest rates, foreign exchange, emerging markets, mortgages, flow credit, structured credit, and commodities. We used to operate in silos, where each of those businesses was run as a unit. We began to ask ourselves “Is there a common denominator that’s reasonably large and can benefit all seven businesses?” We still need product experts in each business, but maybe they can work from a common technological platform. So instead of having seven separate and distinct teams, we have seven smaller teams focused on what is unique to each business and one bigger team underneath.

However, this process required significant alignment from business units that were responsible for their own profitability and therefore prized their autonomy. Cohen highlighted the challenges:

To get seven businesses to make the short-term sacrifice necessary to get standard- ization right takes discipline within the firm. Costs of developing these platforms are allocated back to the businesses so the short-term pain is real. The vision is one thing, but the real edge is getting the organization to break down the barriers to operate in a digital world and overcome traditionally deep vertical barriers.

Korn elaborated on some of the difficult questions the firm grappled with:

Our shift from financial products to applications is organizationally complex to manage. What business are the people building these applications aligned with? It’s easy for product-specific applications, but if I am building analytics for the entire firm, where do I sit in the organization? How do I get paid? How do I know what value is being generated? These are very complicated issues.

Strengthening the Core
As Goldman developed its technology platform for internal purposes, the firm saw an opportunity to offer direct access to its internal tools to a select group of institutional clients. Chavez explained the impetus:

Imagine if Google were closed and proprietary. You would call your Google sales representative to do a search, they would come back with results, and then you would call them back to refine or redo the search. This is how our business was done—we would go back and forth with our clients on the phone until they were satisfied with the product we developed for them. Why not give them direct access to our platform and our tools?

Chavez had this vision in mind when he built the platform for internal use. The system was developed with application program interfaces (APIs) that could be accessed by internal business units or external clients. The platform was christened Marquee, a play on the first name of Chavez, its architect and champion. Its suite of applications grew to incorporate tools that facilitated risk analytics, portfolio construction, market data and research, sales, trading, and post-trade tracking (see Exhibit 2). Each application was first designed to meet an internal need, which allowed for an iterative development process and exhaustive testing. Although originally built for internal use, all applications were

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designed and developed to be self-contained and were therefore easily integrated, both internally and externally. This discipline provided Goldman the option to open applications to clients, if and when the opportunity was ripe.

The Marquee suite of applications was built on top of SecDB, a powerful analytics database that tracked and managed risk, and represented “twenty-five years of continuous innovation”33 at Goldman. It calculated 23 billion prices daily across 2.8 million positions and 500,000 market scenarios. SecDB helped Goldman and its clients price securities, analyze potential trades, and monitor risk.34 One of the first Marquee applications was StrategyStudio, a portfolio construction tool that Gary Cohn, President of Goldman Sachs in 2015, described as follows: “StrategyStudio allows clients to quickly build and analyze a custom investment strategy using indices and [Goldman Sachs] baskets across both equities and fixed income. The tool also provides back-testing, and advanced capabilities to monitor and manage portfolios on a daily basis.”35

By making applications available to clients, Goldman hoped to claim valuable space on clients’ desktops and enhance customer dialogue that would position the firm as a preferred partner for trade execution and other transactions. Tighter integration with clients also had the benefit of creating a potential competitive advantage. However, many saw this as a risky strategy. “Some outsiders and Goldman alumni question whether the firm will win enough client business to justify sharing more of its analytics with clients,” reported a Wall Street Journal article.36 They wondered if clients would use Goldman’s tools to do the analysis for free and execute those trades with a competitor. SecDB had been a source of substantial competitive advantage for Goldman, and the firm viewed it as a highly valuable asset. The Wall Street Journal quoted a source as saying Goldman had rebuffed an offer of $1 billion to license the database, contemplating its value to be closer to $5 billion.37

Commenting on the concern that clients might do the analysis on Goldman’s platform for free and trade elsewhere, Paul Russo, Global Co-Chief Operating Officer of the Equities Franchise, said, “Advice was always free. Clients paid for a bundle of services that included research and execution.” Russo added, “If we don’t cannibalize ourselves, someone else will.” New regulations were also pointing towards the unbundling of research and execution. To create transparency and avoid conflict of interest, Europe was planning to introduce new regulation in 2018, Markets in Financial Instruments Directive (MiFID II), which would require firms to unbundle research and execution. Cohen wondered if this provided an opportunity for Goldman to consider a subscription model for its research and analytical services.

Extending the Core
In addition to leveraging technology to create internal efficiencies and to strengthen its core business with existing clients, Goldman also pursued new lines of business and new customer groups.

SIMON Part of the Marquee suite of applications, the Structured Investment Marketplace and Online Network (SIMON) was designed to help clients build and purchase structured notes, which were highly customized risk-return products. Structured notes were popular in Europe but had limited penetration in the U.S. due to a highly fragmented market of broker-dealers and investment advisers who were unfamiliar with the product. Jason Broder, Head of the Private Investor Products Group, described why this provided a unique opportunity to Goldman:

Penetration of structured investments in the high-net-worth client channel, i.e., Goldman’s Private Wealth Management business, is about 5% to 10%. But if you go downstream in the broker-dealer channel, the penetration is probably 0.25%, not just for

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Goldman, but for every issuer. Yet the assets under supervision in this channel are on the order of $6 trillion.

SIMON was built with these new target customers in mind. It provided a web-based, easy-to-use, end-to-end marketplace for structured notes that focused heavily on product education, risk assessment, and oversight (see Exhibits 3, 4, and 5). Russo summarized the benefit of SIMON: “Instead of making ten calls to us as they did before, clients can do scenario analysis of maturity and cost by issuer and get the information they want themselves, like Google. By giving clients access on their desktop, we massively decrease the sales cycle.” In 2015, the first year of SIMON’s operation, Goldman attracted thousands of advisors from 18 brokerage firms, representing client assets close to $2 trillion.38

Without a retail sales force, Goldman had historically been unable to reach smaller broker-dealers and non-Goldman investment advisers. By creating the SIMON online marketplace, Goldman not only created the ability for its clients to create, analyze, and buy structured notes electronically, but it also built a channel through which it could reach an entirely new customer base.

Opening SIMON to competitors In 2016, Goldman made the bold move to open SIMON to competitors, allowing SIMON users to buy structured notes not only from Goldman Sachs, but also from rivals such as Wells Fargo, CIBC, and TD Bank Group. Adding competitors to SIMON, thereby allowing outsiders access to its customer base, represented an interesting shift in Goldman’s strategy.

Two key factors influenced Goldman’s decision to move to a multi-seller platform: reach and variety of offerings. Russo explained, “We realized that growth of the single dealer model had reached capacity. To continue to grow we need to add more issuers. Clients also like competition. Having multiple issuers allows clients to mix and match credit risk against payoffs effectively.” Cohen agreed: “We can compete by making the pie bigger.”

Moving to a multi-seller platform resulted in a significant increase in customers and trade value. During 2016, the number of SIMON users jumped nearly 500%, from 2,400 users to 15,000 users at 43 brokerages. There were thousands of active users on the platform each month, and trade value increased by over 300% from 2015. As a result, Goldman’s structured note sales increased fourfold from 2013 to 2016.

Organizing for Change
Two groups at Goldman were instrumental in implementing its firm-wide technology strategy: The Principal Strategic Investments Group and the Digital Strategies Group.

Principal Strategic Investments (PSI) Group In 2000, the PSI group was launched with the dual goals of leveraging technology to shape and build market infrastructure for Goldman’s core businesses and managing the firm’s $1 billion strategic investment portfolio. In 2017, PSI was led by Darren Cohen and consisted of 30 employees, sourced from different functional areas across the firm (including sales, trading, technology, operations, and investing) and through its network in major technology hubs, such as California, London, New York City, and Israel. The breadth and depth of experience within PSI equipped the team to work effectively with individual business divisions and to make targeted investments.

PSI worked closely with the Securities Division, one of the key revenue generating divisions of the firm and heavy consumer of technology, as well as with the Technology, Operations, and Consumer & Commercial Banking divisions, and in an informal role with the Investment Banking and Investment Research Divisions. Goldman chose to embed PSI in the business divisions, as opposed to an executive

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team that existed outside of the functional groups, to stay close to business needs and to foster a collaborative working relationship. PSI played a consultative role, helping domain specialists to define and document business needs and build implementation plans, which, if viable, would lead to firm investment.

The group created a consistent process and investing discipline that was implemented across the firm, but worked hard to stay close to each business unit. Cohen described the process as a “deeply matrixed and integrated web of relationships and credibility.” The investment of time was key to develop trust between PSI and the business owners, particularly in the face of the “natural tensions” that arose from competing investment timelines, such as trading desks looking for short-term P&L impact while PSI focused on longer-term strategic impact. Since its inception, PSI had worked in concert with many different asset classes, including equities, interest rates, commodities, credit, and foreign exchange, which led to a centralized bank of institutional knowledge on digital transitions within the Securities Division.

In its strategic investment management role, PSI acted “partly as a venture capital” group as well as worked with domain experts across the firm to shape the product offerings at existing companies. The group focused almost exclusively on technology relevant to Goldman’s core businesses, which Cohen described as “including minority investments in exchanges, trading technology, data analytics, fintech, enterprise technology, and spinning out our technology platforms.”

PSI’s performance was measured against two benchmarks—a qualitative measure of its strategic impact on individual divisions and the firm, and a quantitative measure of its return on portfolio. In early 2017, the PSI portfolio consisted of approximately $1 billion in investments in a variety of companies (Exhibit 6 shows select portfolio companies).

Digital Strategies Group (DSG) In 2016, Goldman created DSG, a complementary cross- functional group, to coordinate digital strategy across businesses and oversee implementation across the Securities Division. While PSI concentrated mostly on enhancing individual business units and managing the external investment portfolio, DSG focused more on internal coordination across the division, in which asset classes historically operated very independently. This initiative had strong support from senior management at the firm. A June 2016 internal memo introduced the group:

Over the last several years, we are conducting more of our workflow, and delivering more solutions, content, and liquidity to our clients, on digital platforms. The significant growth of tools and applications across businesses within Equities and FICC requires a broad, comprehensive approach to manage resources, reduce redundancies, streamline the client experience, and achieve technological scale for the Securities Division.

We are pleased to announce the creation of the Digital Strategy Group (DSG), a cross- functional team that will develop a unified digital strategy for the [Securities] Division.

The DSG will work with the Franchise Desktop Group (FDG) to automate and enhance franchise workflows through ongoing investments in Customer Relationship Manage- ment (CRM), data analytics, internal web apps, bots, and Symphony. In addition, the DSG will oversee our Marquee initiatives by approving business plans, reviewing product roadmaps, aligning resources, measuring progress, and coordinating our go-to-market strategy.

As part of this effort, we have asked Principal Strategic Investments (PSI) to collaborate with our businesses to develop plans for our major internal and external digital initiatives.

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As our digital initiatives expand, the DSG will enable us to make globally coordinated, cross-product, timely decisions on the strategy, resourcing, implementation, and marketing of our digital offering.

Venturing into Retail Banking: GS Bank and Marcus
During the financial crisis, Goldman became a bank holding company, which gave it the ability to sell to retail customers. In 2016, Goldman took advantage of this option and launched GS Bank, its online savings bank for retail consumers, which offered customers significantly higher interest rates (1.20% annual percent yield on deposits at GS Bank compared to 0.01% at most major banks) and no minimum deposit.39 A few months later, it launched Marcus, an online lending platform offering personal loans to consumers. Consumer deposits at GS Bank provided Goldman with lower cost capital than its traditional funding sources, and Marcus leveraged the firm’s experience with managing risk and provided another outlet for its balance sheet. In a press release announcing the launch, Goldman Sachs described Marcus:

Named after Marcus Goldman, one of the firm’s founders, Marcus by Goldman Sachs is a new business that benefits from the firm’s 147-year history of financial expertise, risk management and customer service. Marcus provides consumers with a transparent and simple approach to consolidate their high-interest credit card debt. At Marcus.com, credit- worthy borrowers can apply for fixed-rate, no-fee personal loans of up to $30,000 for periods of two to six years.40

Blankfein described Goldman’s entry into consumer lending as, “One of the places which historically we haven’t done as much of, being an investment bank, and so what we are doing is we are building lending platforms and lending businesses.”41 Chavez elaborated on the rationale behind GS Bank and Marcus:

Intense regulatory oversight led us to become a bank holding company, so we started exploring its potential benefits. We have always been in wholesale and did not know anything about retail business. But we know risk management, we have a strong balance sheet, and we are good in technology. Lending is a service that involves risk management and can be delivered digitally. Using APIs and automated processes, we were able to launch it within a year.

Through Marcus, Goldman was reaching retail consumers directly, a big departure from its focus on institutional or even high-net-worth investors. The personal lending space was crowded with competitors, ranging from large banks, such as CitiBank, JP Morgan Chase, Bank of America, and Wells Fargo, to fintech start-ups, such as LendingClub, Prosper, and SoFi. This led to intense competition and high customer acquisition costs.

By April 2017, GS Bank had $115 billion in deposits, making it one of the top 25 banks in the U.S. However, the online lending market remained small, with only $40 billion of credit extended over a decade.42

Conclusion
We are not in the business of predicting the future. Instead we do a lot of contingency planning.

— R. Martin Chavez, CFO and former CIO of Goldman Sachs

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Change was in the air at Goldman Sachs. A combination of catalysts, including regulation and advances in technology, were driving the firm to adapt and innovate. The number and seniority of engineers at Goldman Sachs reflected the firm’s commitment to this effort.b The post-2008 reality was forcing Goldman Sachs and its competitors to reassess where to play and how to compete. Glimpses into Goldman Sachs’ strategy were evident through initiatives like Marquee and Marcus, but how did these and other recent initiatives fit into the firm’s overall business model? Was Goldman Sachs’ core business changing, or were products like SIMON and Marcus on the periphery? What was driving the firm to open up access to internal tools that had long been seen as a proprietary competitive advantage, and how could it justify inviting competitors to sell to its clients? Was the longstanding focus on institutional clients giving way to greater emphasis on retail clients and services? And what did it mean for the future of the banking industry?

b In 2017, 9,000 employees, approximately one-quarter of Goldman’s staff, had an engineering background and 37% of the 2016 analyst class had STEM (science, technology, engineering, or mathematics) degrees.

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Exhibit 1 Goldman Sachs Net Revenue and Pre-Tax Earnings, 2007–2016

Source: Compiled from SEC filings data, accessed April 2017.

Notes: Before 2010, Goldman Sachs reported its business in three segments: Investment Banking, Trading and Principal Investments, and Asset Management and Securities Services. In 2010, Goldman split Trading and Principal Investments into two business segments: Institutional Client Services and Investing & Lending. FY 2008 and FY 2009 data are restated.

Total pre-tax earnings do not equal sum of business segments due to firm expenses not allocated to a business segment. Goldman Sachs’ Business Segments:

· Investment Banking advised clients on mergers and restructuring, as well as assisted companies in raising money through equity offerings and debt issuance.

· Institutional Client Services was a liquidity provider (bought and sold securities, earning revenue on the spread) for a range of asset classes for institutional clients. It also offered research, lending, and financing services.

· Investing & Lending invested Goldman’s capital in debt and equity securities, loans, and real estate entities, and provided funding for clients by originating loans.

· Investment Management managed investments and offered investment products for a diverse range of institutional and individual clients.

o Compiled from: “Who We Are: At a Glance,” Goldman Sachs, n.d., http://www.goldmansachs.com/who-we-are/at-a-glance/, accessed May 2017.

518-039 -12

Exhibit 2 Marquee Tools

Source: Gary D. Cohn, “Goldman Sachs Presentation to Deutsche Bank Global Financial Services Investor Conference,” Goldman Sachs, PowerPoint presentation, June 2, 2015, p. 11, http://www.goldmansachs.com/investor-relations/presentations/archived/db-presentation-6-2-15.pdf, accessed April 2017.

Source: Gary D. Cohn, “Goldman Sachs Presentation to Deutsche Bank Global Financial Services Investor Conference,” Goldman Sachs, PowerPoint presentation, June 2, 2015, p. 11, http://www.goldmansachs.com/investor-relations/presentations/archived/db-presentation-6-2-15.pdf, accessed April 2017.