Markets, Layoffs, EM, and Goldman (Podcast)

Financial Crisis. It was a horrible year for a lot of investors, but not for our next guest, Phil Tays, managed to keep his head above water or just barely right two thousand eight, UH Tays was down just three percent. The rest of the market was down forty one percent. Um. He did just as well, maybe better. He returned money in two thousand and the benchmark lost thirteen percent UH in the beginning of the pandemic. He was also smart enough to get out right away in March and to

get back in until mid April. He joins US Now Phil Tays, he runs Tay's asset management. Phil, how do you manage? How do you navigate these choppy waters? Um? It's been two is awful as well. Um, how was the year for you and what are you doing in Yeah, so two is a pretty good year for us on a relative basis. People don't like relative to returns. They'll they like absolute returns, but only people who didn't lose money don't like relative terms. Right, so we lost less.

But what what we do is, as a core principle, is we try to create ways to people for people to be in markets, participate in financial asset appreciation, but address the contingency that they may go down. And I think that's what's so fascinating about this marketplace is that Gene Fama, with his oppressive amount of data that support the efficient market hypothesis, suggest that you should always be

invested no matter what. What that does is it creates amazing contrarian plays, right because if the entire world thinks that you should be fully invested at thirty times earnings, and it's pretty is that markets are going to go down at some point, then if you create a mechanism uh to de risk, that is helpful. So what what is it? You're probably looking for more detail. What we do is we have two ways of hedging against risk. One is trend following algorithms, that just move us out

of the way. In the beginning parts of declines have been pretty liable, reliable historically. We've been doing it since nineties six, as you pointed out, so it's you know, it's got a good track record. But we also use options and creative ways to both use options to hedge but also figure out ways to pay for those options. Nice. So what is your go to hedge at the moment? I felt like in twenty two was you buy the dollar, you buy commodities, You were set, what what's the hedge? Well,

so ours is less complicated than you might imagine. We're not. What we're not doing is creating complex head hedge fund strategies. What we are doing is just investing in conventional types of things stocks and bonds, high yeld bonds, UH and the way we hedge right now, we're actually almost fully allocated right bonds. Stocks and bonds have been moving up

decently this year. We're back in the markets, but we're very close where a hair trigger away where if the market turns lower it penetrates our target cell level for at least our trend following algorithms will scale out of the markets and we'll go to sometimes investment grade bonds, but if bonds are getting battered as well, will be fully in cash instruments. Yeah, I mean, we UM have

seen a little bit of a turnaround. The last couple of days under the SP five came in below it's two day moving average, and we snapped a bunch of winning streaks that we've seen. Also warnings from some big, big investors. Howard Marks was on with Romaine Bostic the other night and said he thinks it's the possibly the end of the junk rally, or at least we're UM

fully priced there. Yeah, so fairly priced, fairly valued. You know, if you look at the downturns we've seen since the financial crisis, including the financial crisis, they've lasted as long as sixteen months. I would guess that the market place as a whole just has this sense that it's over, that the downturn is over. We've had a you know, a twelve month horrible market for both asset chlorasset classes.

But I think the thing that is a real challenge for most investor terms and that vast majority of people listening to this show, is that it's not over. And really, if you have a big percent decline. Without a long duration, it doesn't matter that much as long as you don't sell. But once you start to stretch out to two years or three years, people that need to take uh income from assets, and that includes bonds of course, where the

people have losses start to be negatively affected. So if you ask what gets you back in the workforce when you're retired when you don't want to be, it's that multi year declient. So I think, you know, looking at valuations in the stock market, h just looking at all of the challenges, one of them being global debt, and you know, and you're you're just talking about the fact that everyone's so focused on this binary question about what

the Fed is going to do. I think it's because it really matters, and there's a lot more risk in the marketplace in their historically. I mean also because you know, we could be looking at an absolute see change. I make fun of crittious youth because a I'm Elis and she's smarter than everybody else, So you got to pick something right. But the last time we had interest rates above zero, she was on juice boxes and snack of us.

You know, it's been it's been a solid generation of extraordinary monetary policy, and now are we just back to something that none of us is really used to anymore. Well, it's interesting as you say that, it sounds like, oh, we're gonna get back to normal, But I don't think there's a normal right now, because if you think about where when were we lasted a hundred times depth of GDP on a on a fiscal debt level in the United States back in back in after World War Two? Right, Well,

what was the GDP growth following that? Around eight percent a year for two decades. So we have these sort of existential crises, these things that are really fascinating things to think about, but potentially perilous to live through. That are gonna be with us. We're gonna have to, you know, fight our way through. And so I think that it pays to start to think unconventionally, start to think about Okay, yeah, Gene Fama is right, Normally you should just stay invested

in the markets. But how can we address and this is everyone just wants to bet on the optimistic scenario, right, just stay invested, conventional portfolio, But how can we address the contingency that one of two things happens that could both happen together. First, the rate could continue to go

higher and we have more persistent inflation. You know inflation in the United States If you look back in the last three episodes of the last hundred years, it lasted between four and nine years, not twelve months, right, So we could have more persistent inflation, higher rates, which is caused bonds to lose. And also that we could test the loads and break a lot lower in the stock market.

So don't bet on that, but address the contingency of that. Well, you're speaking about the credit market earlier, and I want to circle back to that, because if you are worried about the risk and the recession, it doesn't feel like credit markets are really pricing then in when you're looking at spreads on the surface, I mean investment graines spreads for our audience, on downturns, you usually go about two

hundred bases means we're nowhere near there. Even on high yield eight dred to a thousand basis points, again we are nowhere near there. So pretty this is the same imaginary friend we've had for the past year, which is the FED pivot, right, uh, And so everyone still I mean, we started out no inflation, then transient inflation, now inflation, and all along the way we were not thinking the FED RUC is gonna be raising rates as much as

they have. So it's really just the same story played out in three where everyone's assuming the Fed's are not going to act as much as they are, but then they do, and then we potentially realize the consequences. I'm keeping that one imaginary friend is the FED pivot. I love that you started, by the way, the Behavioral Investing Institute, and we've been talking for a couple of days now

pretty seriously about the consumer. Because the big banks were at with earnings right so we're all watching savings rates, banking balances, credit card usage. What do you think about the US consumer right now? It's pretty strong every kind of behavior right now, the investor behavior, consumer behavior as a whole, a whole another ball of wax right right. And I think that's a good indicator that that maybe

markets haven't bottomed. I mean, when when you've got lines around the corner for fifteen dollar salads and you know, everything else seems to be durable good for big big goods purchases are still pretty impressive. I think it indicates that the mindset of bear market or crash or recession has not set in. And that means probably once people realize that it may, that'll be a negative for markets. All Right, you have, I guess founded a new holiday. How do you how do you put this into words?

You have established um and inaugural National Investment Risk Management Day. What what are you trying to do increase financial literacy? Well, it started out as our head of education and Training, Dan Coleman, came up with the idea, it's actually on my birthday, which was yesterday birthday, thank you or happy after birthday? You have to say after birthtor like anyway, So and and we it was sort of a an austere suggestion that the investors should look at their portfolios

and address risk. And we were talking to our PR team and I said, let's let's let's make this fun. And what I what we did is I rewrite the press release myself. And it became like, oh my god, what are we doing? And so now every year we're going to try to address what are the three stupidest investment ideas we've had. I'm gonna I'm gonna tweet out the press release for you. Phil taste from TAS Asset Management. Great having on the program, we've heard, you know, layoffs

coming out of Microsoft and for layoffs coming out of Amazon. Um, what's the furniture wayfair? There you go? So tons of these West Coast companies. Let's bring an Aora Runna right now. He covers tech for Bloomberg Intelligence. Don what what are we seeing in tech? Is it fair to say that this is the beginning of a wave of layoffs. I don't know if it's a beginning or be out of

the middle eanning. But you know, if you look at it over the last three to five years, a lot of these companies have you know, some of them have doubled their head counts, some of them have gone even you know, more than that. And that was driven by a lot of demand that we saw in the pandemic. But if we see this year, take spending is going to slow down. Cloud businesses are going to slow down. And then if you want to maintain your margins and be you know, have the right size UM I would

say workforce, you will see some layoffs. So you know, let's say the case of Microsoft, five percent decline in head count is not that big of a deal when you've doubled your head count in five years, But then what happens when is this kind of a a scenario where it's one step backwards in terms of headcount only to kind of release the valve for the next few years. Is that kind of the way to look at this. It will a lot will depend on what kind of demand we see next year or what kind of rebound

will see. Now, if there is a lack of demand, then you're not going to see massive hiding going in. But if the demand comes back like we expect it will, you're going to see a massive acceleration and by our hiding at that point. Because there is a very strong quote lation of revenue growth and employee growth, it's usually you know, very close to one to one or point one to point nine. But what especially at Apple sauce um, they are sorry alphabet, they are not only laying off

six and a half percent of their workforce. We saw reports on CNBC the other day that they're pushing out bonuses um and this is pretty harsh. I mean, normal people, even if you're not supposed to rely on bonuses as a way to cover living expenses. So if you all of us shudden say in the middle of January. Hey, we know you're used to getting your whole bonus now, but we're only going to give you part of it

and the rest of it in two months. That screws up a lot of people's uh, you know, bill paying abilities. You would only do that if you were in some kind of trouble, wouldn't you. Um, they didn't generate a lot of free cash flow a b unlike Amazon's you know, workers in vade houses. The people who work at Google are not struggling. They make a lot of fair point, fair point. I mean, there probably are some people who

don't make a ton. They're not all programs. I'm fairly fairly confident that the average compensation throughout the ecosystem is way over you know, three d four thousand dollars over there. Well, hopefully they don't have too many kids in private schools. I don't know, man, four hundred thousand still, so so let me let me back up. Let's say go three to four years. These the tech workers have had a bonanza over the last several years, from stock options to

really high raises because of the shortage of labor. And I can assure you, right now even for almost every category in technology. If you break down database administrator, software engineers, um AI developers, all of them are in massive demand right now. So other industries out there, you know, whether it's energy, industries, manufacturing, anywhere, They're going to be hired

without a problem. This rings a lot of bells when it comes to and you might not be able to answer this, but tell me if this is in the discourse. Here are people talking about things like immigration when it comes to hiring right now. I mean, I'm thinking, like my parents tech boom of the nineties here going into computer engineering, what happens when that immigration standard is up,

dropped down or made more complicated. So I did a big report six seven years ago, um, you know about the restrictive immigration policy and what it would do and one of Trumpian policy that Biden really hasn't turned around. Yeah, I I was surprised at that. And you know, one of my predictions was Canada is going to really benefit

from it. And we have seen a massive boom of immigrants and for that matter, a massive tech center near Mississauga because of that, because of a lot of the immigrants going there and creating development centers for software companies. But let me assure you this thing. You know, from a tech unemployment rate, we are still way past full employment.

This you know, if if you have added let's say for Microsoft case, I'll tell you, in the last five years they've added hundred thousand people, letting go of ten thousand people is not that big of a deal in my view. All right, Well, hopefully those ten thousand people see it the same way because sound our push up. Pish I is taking full responsibility and he apologized, and I just can't imagine this generates a lot of positive

sentiment towards him running the company. You know, even if you're making four a thousand, if you've got three kids and you've got a ten dollar mortgage, I mean, I realize you're living large, but it's still kind of hurty. Yeah, children are expensive. All right, We're gonna continue to talk about the layoffs on the West coast. They're really global layoffs as well as the winning quarter that Netflix had. The stock is up again six percent. Let's bring in

right now. Are Bloomberg Intelligence analyst Punham Goyle joins us see a senior analyst for e commerce as well as ath leisure and off price retail. That is a hell of a round up there. And then Man Deep saying senior analyst for tech companies. He covers all those tech companies that touch the consumer like Apple, sauce. Man Deep, let me start with you, uh these layoffs from Google, and I want to get your take also on the

kind of I feel like suspicious name change. I know it's been years now, but I still haven't forgiven them for it. What do you think? Well, so look at how much these companies have grown in terms of employee based Google or Alphabet, for example, has added about fifty employees in the last two years. Now. Granted they were growing out of you know, the top line growth was also north of and they're operating profits also doubled in

this period. The question that you have to ask the management right now is what were they forecasting in terms of, you know, future growth. And I think that's where all these large tech companies got it wrong, in terms of just you know, what is the projected top line growth.

And in the case of Alphabet specifically, it's the search business that subsidizes everything else, whether it's cloud, YouTube, their hardware ambitions, and none of those other segments actually is close to being profitable barring maybe YouTube and and so that's where I think they're realizing that search is obviously maturing, and we have all sorts of problems with the digital ad environment right now, and they just can't maintain that

profitable growth anymore. And I think I mean again, in terms of the head count, it's still twelve thousand versus fifty thousand they have added in the last two years. But it just goes to show that this period, if you look back, was unprecedented in terms of tech hiring. Yeah, well man, deep it's interesting to find that this this tech story just continues to unravel at a time when almost the share prices are almost rewarded by it, and and it really comes down to a question of cost efficiency.

Of course, we do feel for the folks who are getting laid off, of course, but I want to fold in the retail side of the story as well. Putam Goyle also joins us from Bloomberg Intelligence, because it's not just Alphabet that came out with this news. Wayfair also announced job cuts and put them I wonder, is it the same dynamic in the retail space that made is talking about in the tech space a little bit of

it is the same. You know, if you look back to Wayfare than the number of employees they had in eighteen it was about twelve thousand, and as of the latest ten cakes about sixteen and a half thousand, So definitely yet you know, a big step up and employees and as they scale back roughly seventeen hundred and fifty employees now it's just really a measure to get cost

back in line. All retailers across the board are struggling to drive profitability as sales have come off following pandemic boom, especially for Wayfare where you know, the home is where people invested at the peak of the pandemic, that's where your funds went, and Wayfare benefited from that. And as all that pulls back, even though they are in a secular shift where they will benefit from the move from stores to online, sales have dwindled and now the move

is towards profitability. So for them to get to their goal of IBADA neutral this year, UM, they needed to cut these costs. They had to cut a billion and a half dollars roughly, and half of that is through

the employee cuts. Well, stick with that story because I almost wondered, and Mandy, if I'll get to you in just a moment, but I almost wonder how much of these layoffs are really some sort of dynamic of one step backwards to kind of be cost efficient in the short term only to kind of prepare for mass hiring

as we talked about a new economic expansion. Do you see that dynamic playing out in the retail space over the next couple of years now for rightfare, because if you look at the composition of their cost cuts to the seventeen and fifty employees that they talked about cutting today,

the bulk of that is in corporate so um. You know, you can argue that when they weren't in their peak growth mode, which was largely you know, they went from one point three billion dollars in revenue to five billion dollars in twenty seventeen seventeen, and now they're approaching about twelve to thirteen billion dollars, so massive growth. But the hiring that they're pulling back isn't at the warehouse level largely,

it's it's our corporate right. If you think about the number of employees that they're letting go up, So I don't I don't think that we will have another massive increase, especially also as retailers and brands are largely right now looking at automation to help alleviate some of these growing costs. You know, wages are rising, rents are rising, transportation expenses, shipping, everything is up um in multiple folds. So I think they'll just be looking at automation more as they continue

to grow the business to save costs. Man, deep, is there risk um that some of these at least some of these companies and we've got a list now too long for me to mention of tech companies that are coming cutting you know, double digit thousands of jobs. Is there a risk that things go better than expected and they have to turn around and hire back again after

having tarnished their reputations. I don't think so. I think this is a sort of you know, downturn where clearly in hindsight, there was a pull forward both in terms of growth and profitability, and that's why these companies ended

up in this position where they overhired. So in my mind, even if we have a shallow recession or slow down and things rebound, they have learned their lesson and I doubt they're gonna do it again in terms of, you know, the hiring spree they went on, in terms of you know, just the talent wars that transpired, and and now it's the same with layoffs. Every company is doing it the same way they hired all these people. So I don't think we're going to see a return of that anytime soon.

Mandy thirty seconds here very quickly. Do you see the stock market or do you share prices really benefiting from more and more of these layoffs. Well, so they will

come out of this downturn. I don't know how long this is gonna be much stronger, and the businesses that do survive again, not every company is gonna be in the same position as they were before, but the ones they do survive and they're competitive of motives in tech, will be a more profitable down the line, all right, Man Deep saying senior analysts for technology at Bloomberg Intelligence and uh Punum Goyle as well, senior analysts for e commerce at Leisure and off price Retail, but really kind

of techy there as well from b I great to have both of you on the program. What today for for tech for West Coast firms acting globally in terms of UM, their layoffs, in terms of their head counts. A lot of them with massive head counts. Amazon has a two million people working for him, and a lot of them with big cuts in percentage terms UM. Alphabet cutting six percent of its workforce. We're gonna continue talking about these markets were on an up trend. This is Bloomberg.

We've been talking a lot this week about the reopening of China, especially as it relates to commodities. Remember the dream I had at the beginning of the week creating yeah, I had. I had this dream that I was at a diner with Jeff Curry from Goldman Sachs and we were pitching some investors on commodities because his story I thought was so good, or his premise that the reopening of China plus a not not so bad economic outlook in Europe plus a slowdown in the FED would just

drive commodities prices higher. I lived through this in two thousand seven, two thousand and eight, I saw, you know, oil go up to one of barrel for West Texas Intermediate and it was pretty amazing. I want to bring in Nick stat Miller right now. He is the head of Global product over at Medley Advisors and he joins

us now in the Bloomberg Interactive Broker Studio. Nick, what's your take on having had a lot of experience internationally um in the Middle East, watching what goes on in Asia on the China reopening, what does this mean for global markets? Well, thanks, Matt. We're actually a bit more optimistic than the consensus. We think full your growth in China is actually going to come in north of five percent,

which is a higher than the market consensus. But this is going to be a different kind of recovery than what you've seen in China in previous times. You mentioned the post GFC recovery in China, which was very infrastructure lad an investment from government spending. But China actually already did a lot of infrastructure stimulus last year and they're unlikely to repeat that. And the housing market is getting slightly better but coming in on a pretty low base.

But it's going to be consumption that's going to lead this one, which is very different. Chinese consumers have of GDP and excess savings right now, and as that economy opens up, we really look for a Chinese consumer demounts to grow quite a bit. Well, there's I think a couple of things that we shouldn't lose sight of. One is that not everybody expected China to cancel COVID zero so quickly and so soon. Um, so that's kind of a surprise to investors or it has been, you know,

now a two month old surprise. But also they have been working hard to build up this Belt and Roads initiative, uh, you know, based priming trading partners, especially in Europe and Africa, Europe, the Middle Eastern Africa. What kind of dividends is that

going to pay as they open up. Well, on the domestic side, I think that, you know, it did catch a lot of people off surprise by surprise, and our China analysts says that this was, you know, largely due to some domestic pressures, and so rather than trying to flatten the curve, they're basically just steepening the curve on COVID and saying, let everybody get it and let's reopen

and move on. So that's the domestic story. On the foreign story, you know, the Belton Road initiative has has hit a lot of snags over the years, and especially right now, you have several African countries deep in distress, and then Pakistan and Sri Lanka, who are also pretty big beneficiaries, having some serious problems with their death sustainability.

So it's probably going to be a pretty bumpy road, I would say, in terms of China's foreign investments and sort of reaping those long term dividends, at least in the short term. I don't think that they're going to see a lot of benefit fit from the Belton Road investments that they've made. Well, one of the I want to go back to Matt's dream here slash the street

call from Jeff Curry. One of the reasons he's so bullish on this commodity supercycle that he he says is going to come is this idea that he's comparing the Chinese reopening specifically something similar that we saw in two two thousand nine, this kind of massive stimulus package we saw back then. Is that a fair comparison to make. Are we expecting Chinese demand, domestic demand to really come

to that level? Well, I think the story is again the consumption led by the excess savings, the fact that you have, you know, the Chinese consumers who just haven't been able to travel or do a lot of things that they wanted to. So one of the places you're probably going to see a big pickup in demand is in jet fuel. And there are a lot of interesting proxy traits that our clients have been looking at to

play reopening in China. One of them is to go along that TI bought because of increased tourism into Thailand. Thailand opens and Chinese consumers start getting out again. UM. But in terms of the other metals, I think because infrastructure is going to be less a part of this recovery than once you've seen back in two thousand and eight and two thousand nine, it's probably not an immediate fillip to some of the industrial commodities UM in the

same way that it was in the past. But there are some you know, over the mediums from over the next decade, there's some other reasons to be quite excited about copper and some other commodities. But I don't think it's the China reopening story this year that does it. So how do you model something like that if your numbers are still perhaps a little bit confusing when it comes to the death rate, when it comes to the case counts coming out of China, how do you model

a timeline. It's it's not easy, is the short answer. But I think you know around what actually happens with consumer confidence in China, because that's a big problem. You have lockdowns and then you have sort of self imposed isolation where people don't want to travel because they're afraid

of catching COVID. Our China analysts seems to think that because it's just been such a long time and people have been so cooped up, and the Chinese government are really trying to push that confidence, and that this will probably happen a lot faster than some of the reopenings in the West dead and that you'll see a quicker

return to normal consumer patterns. It almost feels like something we saw, I want to say, in the UK actually when everyone was so cooped up there, like you know what, we're just going to go out and revenge, revenge travel sort of. But it came it came from the came from the government as well, right there, like all right, we're done. Yeah, well even before they let the rest of the populations. What about the FED, which is such

an important part of you know, the global picture. There seems to be kind of a binary bet either you believe that the FED is going to raise rates and hold them high, or you think they're going to have to cut or won't even be able to get to five all of Jeff, goodluck. What do you think over at Medley, Well, our house view is that the FED is going to get at least to five and probably

five in a quarter. Uh And you know, we take the FED at their word, and all the FED officials have uniformly said that they don't anticipate to ease this year. We think the most likely condition if they do go back on that would be a significant deterioration in the labor market. But despite you know, inflation coming down and you know, bad retail sales, bad industrial production numbers out of the US, the labor market still looks really strong.

So I think we're quite a ways away from seeing a labor market that's weak enough that the FED might uhum contradict themselves and end up cutting this year. So we're looking for rates to stay at five or higher end to the end of twenty three. Yeah, we We've We've gotten some pretty depressing news out of the specific companies today, um Alphabet cutting six percent of its workforce

this week. You know, Microsoft cutting five percent of its workforce, Amazon laying off eighteen thousand people, But you don't see that, uh in the labor market data yet. Three and a half percent unemployment, more than ten million job openings, and the jolts. When when do we start to see that come in? I think it's gonna be a while. And you know, the big tech companies and a few of the big banks have been making headlines because of these job cuts, but it seems for the time being to

be rather limited to just a couple of sectors. And then you talk to people and a lot of services industries and there's you know, just constantly talking about how hard it is to find still get employees. Yeah. So if the aggregate, it doesn't really look like a job market where people are really worried about losing their job. By the m Live question of the day, do you see evidence of a wage price spiral? No, that's what I thought. I thought that's an easy question to answer,

But that was did you see it pretty? That was their question. I didn't see the question, but I I also don't see it. I have to agree with you on that one, because they're coming down. Yeah. And also I mean We've seen wages rise clearly, Um, you know, more than they have in the past, but they haven't those increases haven't even kept up with inflation. Yeah. Absolutely, Um, we think we have about a minute left with you. I've got to talked about to you about lot am here.

I want to know how you play for the Argentina. Is it worth having exposure right now? Given the geo political uncertainty there well, particularly in Brazil, there's been a lot of turbulence around uh Lula taking office and of course the storming of the of the capital by a Bosonaro supporters. UM also some concerns that Lula might take

a more populous tact with economic management. But our Brazil analysts thinks that these worries are a bit more a bit overblown, and then over the next few months we're going to see more orthodox policies out of Lula's new team. So we we have a fundamentally constructive view on Brazil at the moment, especially if you get a nice pickup to oil and some other commodities in the coming year.

Argentina has always been sort of a difficult distress case, and we were talking about this at the break and I I just find it very hard to believe that a new government in Argentina later this year is just magically going to be able to solve all their debt problems. So I'm a bit more cautious there than i am in some of the other countries the region. Alright, great to have you on the program. Thank you so much for coming into the Bloomberg Interactive Broker studio. Always great

when we can live. Nick stat Miller, um there. He is the head of Global product over at Medley Advisors. We did just get that news from the Wall Street Journal, the Federal Reserve probing Goldman's consumer business. It is moving the market, by the ways, The shares of Goldman Sachs

to Denise's point, down about two point two. It was higher earlier in the session, by the way, Coming on a day that you're seeing a lot of green on the screen in the market, who better to break it all down and give us some context than our very own Wall Street correspondent, Only Bassik right here in studio, walk us through the context here. What do we need to know? So a few months ago we ourselves reported that the FED had questions about this consumer business operation

at Goldman Sachs. Now, the Wall Street Journal is reporting that the probe itself has concerns around proper monitoring and control systems inside that consumer business. Now, listen, when we think about Marcus, when we think about the broader consumer business over Goldman Sacks, we have not yet really thought about it in terms of any potential compliance and audit functions. Listen. Goldman is a massive bank with some of the like the most you know, impressive lawyers in the world. Right.

But um, when we did think about Marcus and consumer really the problems that have been pretty public, and David Solomon said this himself as I grew too fast, too soon. Uh, and it came at the expense of execution. So you know, really the procution or compliance, well, that execution and that's the thing, that execution of compliance, execution of profitability of

the business. So that's why the compliance issue here raised by the Wall Street Journal and the Federal Reserve here, according to their reporting, is that the compliance, audit and legal functions that that would be separate from a lot of the markets reporting we've been doing. It is interesting that the FED is reviewing this business as Goldman is kind of winding it down because it's not like you know, at first, I thought, oh, they have seen the error

in their way days. Um, not that I know as much about you uh, you know about it as as nothing. I know as much about it as you do. You know, you're all over this story. Um, you know, I just read your reporting. But it does seem it did seem like at first they were just closing this down because it wasn't a profitable business. It wasn't a great idea. Alison Williams has been against it since day one, and

she's our chief banks analyst for Bloomberg Intelligence. On the other hand, um, it is interesting that the FED is reviewing this because it may be a different motivation for them to wind down the business. Maybe they've had problems there that we weren't aware of. Listen, they have an investor day in a couple of weeks here at the end of February. But I would say that you have to think about, you know, the other problems that Marcus

has had. You said, winding down the business. You have to understand very importantly, they're not winding down the whole business. They're winding down certain parts of the business, particularly the Marcus Lending business. Another interesting part of that business is how they get rid of that port folio of loans. Is it just to wind down? Do they look to sell those loans? How does this current probe impact that.

Remember this is an era under the Biden administration where we're seeing massive, massive crackdowns on the big banks, big concerns, lots of big fines from different regulatory agencies. We have Michael Barr stepping up as a supervision chair over at the Federal Reserve. The heat is on for all the banks, and so that's kind of why when you see the review Englment's consumer operations, it being a concerning thing because

you know that the regulators are coming down hard. But the point I'm making here is that the whole consumer business is not winding down. There are still pieces left, and so how does this impact that go forward plan when one of the top priorities for David Solomon from his own mouth is to make that unit profiti profitable. So that's the Wall Street perspective. Let's bring in uh senior litigation analysts for Bloomberg Intelligence, Elliot Stein on kind

of the legal perspective of this. Elliot, your initial take, Well, it's still pretty early you know, to know exactly what the and on. But I think, you know, the concern probably is that in the way uh you know, the c STV is cracked down on the Wells Fargo and you know before that we saw occ fines against City

Bank all related to retail operations. You know, I think the concern here is, you know what, what's the magnitude of what they said is looking at um, But it's still very early to say, you know, I would say that, um, you know, just it's the concern is that there's going to be some sort of like acid cap imposed that you know, well spargo has to suffer through, is suffering through. Um. You know, it doesn't seem like it would escalate to

that level based on what we've seen so quick. But again it's still very early and we don't have a complete picture. What is Elliott Just generally the problem that regulators have with these consumer businesses, what what are they doing wrong with regards to consumer That's not sitting right with Washington. Yeah, Well, you know what we saw with Wells and City was that you know, um that you know, consumers brought complaints to the bank. Um. You know those

complaints were not um, addressed properly. But there's just not enough robust compliance to SERMOS monitoring systems to make sure that that consumers are protected. And and you know we saw that with the Worlds Fargo penalty and again with the City Bank penalty a couple of years before that. But do you know of any concerns that consumers have brought with regards to Goldman, Sachs, Marcus, the Apple card um,

with that consumer part of the business. I haven't seen it, um, you know, And like I said, you know that that's the kind of stuff that that we may get more reporting on and then we'll have a better sense. Um. You know. One thing I haven't done, but that's been me I'll do after this call is you know, the CFTD does keep a uh a database of complaints, so and you can usually see, um, you know, which companies were named in them. So UM, you know, I may take a look at that, um. But again this is

the Federal Reserve. Although you know, Bloomberg News did report um I think a few months ago that that this yes, tob is also looking at Goldman with respect to cedit cards. Um. And but it was also reported in that article. You know that Goldman is is cooperating with those that investigation, and I assume they're cooperating extensively with the feed investigation

as well, so that will also help any potential fall that. Yeah, I mean, I think that CFPB investigation that Goldman had disclosed last summer is an interesting and important this idea that and remember this is a separate set of issues from the Federal Reserve. We said, that's audit, that is compliance, but the CFPB it reports to remind listeners. That's the Consumer Financial Protection Bureau that was set up in the

wake of the financial crisis. You mean, that's not an ordinary acronym these days, I think to give everybody the acronyms, will you call if you have a problem with a bank? Your bank? And so that that organization really spearheaded by Elizabeth Warren in the wake of the financial crisis. As you say, um, they're investigating, according to Goldman's disclosure last summer, how the bank resolves bills, refunds cardholders, advertises its cards.

I think another interesting thing that this happened years ago, but I want to point it out still is that there was a lot of questions and because it's not the first time, of course, that the consumer business has come under pressure. I don't know if you remember we broke a couple of years ago about the question of

any potential discriminate oratory practices there with the technology. They were cleared of that, um, but you know, this is definitely a business that has come under pressure over time. All right. Elliott Steinum are legal analyst Bloomberg Intelligence, UH Legal Analysts, and Snelly Bassik are Chief Wall Street correspondent. Thanks very much for joining us on this breaking news the FED looking into goldman Sacks consumer business. Thanks for

listening to the Bloomer Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller y three and on Fall Sweeney I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.