Reviewing Goldman Sachs' Disappointing Quarter

In this podcast, Motley Fool Senior Analyst Jason Moser discusses:

• Fourth-quarter profits for Goldman Sachs falling 66%.
• How investments in the Marcus brand and the Apple Card partnership haven't paid off yet.
• Disney's blunt response to activist investor Nelson Peltz.

Motley Fool host Alison Southwick and Motley Fool personal finance expert Robert Brokamp talk with Stephanie Marini, CFP®, a financial planner with The Motley Fool, about what investors need to know about how the Secure 2.0 Act affects savings and retirement.

Looking to get a jump start on your 2023 financial goals? The Motley Fool's flagship service, Stock Advisor, is open to new members for just $99 a year! Access this special offer by visiting www.fool.com/intro.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Jan. 17, 2023.

Chris Hill: A wise man once said, never bring a knife to a gunfight. Motley Fool Money starts now. I'm Chris Hill. Joining me today, Motley Fool Senior Analyst Jason Moser. Thanks for being here.

Jason Moser: Hey, thanks for having me.

Chris Hill: We're going to get to the latest in the Disney fight in just a minute. But we talked on Friday about the big banks, most of them reported, but this morning we got the fourth-quarter results from Goldman Sachs. The headline is that this is the worst earnings miss for Goldman Sachs in a decade. Fourth-quarter profits down 66 percent. No one expected their results to be great. But, Jason, I feel like this is actually worse than people had feared. Is it?

Jason Moser: Probably. I don't think this really should come as a surprise if we talked about on Friday with Wells Fargo, Bank of America, JPMorgan, all reporting challenges on the investment banking front. It also taking a bit of a conservative approach, preparing for a potential downturn, boosting loss reserves to account for that. Certainly, there was a tone of caution on the Goldman Sachs call as well. I think a lot of this, you look at Goldman, it's far more levered to the investment banking side of things. It's very understandable. But it's just a very difficult environment right now. If we go to the numbers, not good, that really explains why the stock is being sold off so dramatically today, but revenue down 12 percent sequentially for the quarter, down 16 percent from a year ago. If you look at earnings per share down 60 percent sequentially, down 70 percent from a year ago.

That was after nine straight quarters of double-digit returns. This was a pivot. That this is a big pivot. But I don't know that it's something that lasts forever. But there's a lot that stood out in the quarter, I think, the investment bankers brought in just under $1.9 billion in fees for the fourth quarter. That was down 48 percent from a year ago. You look at net revenue in the asset and wealth management at $3.56 billion for the quarter. That was down 27 percent from the same quarter a year ago, 12 percent from the previous quarter. As we talked about with many of the other banks on Friday, the provision for credit loss is, again, played into Goldman's narrative as well, $972 million for the fourth quarter of 2022 versus $344 million from a year ago, and $515 million sequentially. It's just a very difficult environment for investment banking these days. We're seeing that play out with Goldman's results.

Chris Hill: When do you think we get any signal with an investment bank like Goldman Sachs that things are turning around on the investment banking side. Because to the point you made, a lot of this is not surprising. Maybe the magnitude, maybe the actual numbers were a surprise, but Goldman Sachs, this is the bank that was out there in front signposting back in December that they were going to be laying people off. They actually announced that earlier this month. Is this a situation where they're in their own category because they're so much more dependent on investment banking? Or do you think this is a bellwether for the entire group?

Jason Moser: No. I think that ultimately this boils down to two words, deal making. We're just in an environment where deal making has more or less come to a grinding halt. That is due to current market conditions, plenty of uncertainty in regard to the economy. Recession talk continues. This is just a very difficult time for investors writ large, and Goldman certainly falls into that category. I think that comes and goes, that goes in cycles. We'll see that improve as we see market conditions improve. I think another thing to keep an eye on with Goldman beyond that, they've made investments recently to diversify the business, become a little bit more modern. Looking at things like Marcus, for example, the investments in markets clearly haven't paid off. They are rolling that operation down considerably.

They're going to stop offering new loans on that platform. Another thing in interesting dynamic I find with the business there's this platform solutions side of the business which really focuses on consumer credit, and that stood out as a positive for this quarter. But that really was due to consumers taking on more credit card debt than anything. You take that however you'd like. But even more interesting, I think though when you look at Goldman Sachs' platform solutions side of the business, it lost $3 billion over three years here. But interestingly, a big chunk of those losses have come they're tied to the Apple card. Remember Goldman is in partnership with Apple for its Apple card. So far, granted the Apple Card is still a relatively new product, I think it was rolled out in 2019 or something, maybe somewhere in the neighborhood of 6 million-plus users, it's not resulting in good business right now for Goldman.

It's going to be interesting to see how that dynamic plays out over time if they really feel like that relationship is worth continuing, particularly as we enter this time where we know personal savings rate is it a decade-plus low. We know clearly that Americans are living more and more paycheck to paycheck. They're taking on more credit card debt, which means eventually they're going to have to pay that piper. You just wonder if this is a relationship that is working out as well as they thought it might have in the beginning. But at the end of the day, the bank group book value: 6.7 percent for the year. That puts shares today at around 1.1 times book value. That's not outrageous, I think in today's climate, it's obviously a key player in the investment banking world and they don't think it's going anywhere, but I don't know that things are going to be getting better anytime real soon.

Chris Hill: In a filing with the SEC, The Walt Disney Company has responded to activist investor Nelson Peltz regarding his push for a seat on the board of directors. Look, there were a lot of words in Disney's response, but I feel like it essentially boiled down to the following: With all due respect, Nelson Peltz is not telling us anything we don't already know. He is not proposing anything that we're not already considering. Thank you. Here are some lovely parting gifts.

Jason Moser: It's got to be hard being in it, I think Ron said this last week. He said being an activist is really hard. It is funny. Sometimes it's EVs activists, you think they've got it all figured out. They know the business better than the folks running the show, and in some cases maybe they do.

Chris Hill: Peltz has enough of a track record of success that as we talked about on the show, if it was some other firm, if it was you and me and we've got our activist fund and we had half a percent of Disney stock, they wouldn't give us the time of day, but Nelson Peltz, because of his track record, engenders some amount of respect, but not so much respect that Disney didn't respond the way they did.

Jason Moser: Agreed. I see both sides of this to an extent. I feel like Disney was very clear in their deck they released this morning and they said, and I quote, "Peltz has no track record, large-cap media or tech. No solutions to offer for the evolving media landscape and if MSG Sports is his training ground, it has not been a good one." That's just they're telling it like it is and I don't disagree with them. I think you're right. He has plenty of experience in the investing realm as an activist. This is not necessarily in his wheelhouse, I think now I will also give him credit because I think he's onto something here in regard to the Fox acquisition. He says, the Fox acquisition hurt the company, took the dividend away, it put their balance sheet into chaos. You can't contest that. Those are facts. That said, I don't know that Peltz knows this business, as well as someone like Bob Iger does. Disney is in the midst of a generational transformation in how they produce and distribute content.

I don't even think this is necessarily a business that Bob Iger is fully familiar with yet because they're still figuring it out and that is going to take some time, and it really goes to show I think the advantages in taking that risk of blazing a new trial. Someone like Reed Hastings at Netflix. This is going to take some time for them to fully get this new media paradigm sorted out. That said, I think they'll pull it off. The advantage of the IP, clearly they have good tech and they're in so many living rooms already now, they've done a good job there. It really is a matter of just getting the financials in order. When I say getting the financials in order, I mean, they went from a coverage ratio in 2017. Your coverage ratio is looking at how effectively you are able to service the debt that you have and higher is better. They went from a coverage ratio of 33 in 2017 to 4.5 today and no dividend either. I definitely understand where Peltz is coming from. I don't know that he really stands a chance of enforcing any real change or action, but it's nice to see is keeping management on their toes.

Chris Hill: Pop some more corn. I feel like this one is going somewhere.

Jason Moser: Indeed.

Chris Hill: Jason Moser, thanks for being here.

Jason Moser: Thank you.

Chris Hill: In late December, while most of us were busy either celebrating or recovering from the holidays, Congress passed the Secure 2.0 Act and it was signed into law. Robert Brokamp and Alison Southwick take a closer look at the bill and how it could change your retirement and your college savings. 

Alison Southwick: The final days of December, the congresspeople in Washington were hard at work passing a $1.7-trillion-dollar spending bill. Buried within the 1,400 pages of that bill are 400 pages covering what has come to be known as the Secure 2.0 Act. In typical Washington fashion, SECURE is a tortured acronym for Setting Every Community Up for Retirement Enhancement. The first version was passed in 2019. The recent sequel has all kinds of new rules for retirement accounts, required minimum distributions, and five to nine plans, and here to help us discuss the most important provisions is Certified Financial Planner® and Fool Stephanie Marini. Hi, Stephanie. Thanks for joining us.

Stephanie Marini: Hi. Thanks for having me.

Alison Southwick: Today we're going to cover the six most important provisions of the Secure 2.0 Act. As we go through these, you're going to want to pay attention to the dates that they start because some start this year, but most won't take effect for another year or two. All right, with that said, let's start out with 529 accounts will be transferable to a Roth IRA.

Stephanie Marini: I'm going to take this one. I have two young kids, so it was really interesting for me to see. This provision allows for 529 accounts to be transferred into Roth IRAs, converted into Roth IRA accounts. It helps answer the question for parents or grandparents, what happens if there's extra in the 529 account, or what if my child doesn't go to college or get scholarships? Before anyone runs out to open an account or start converting, there are a lot of requirements to make this work. This provision won't start until 2024 so it is one of those later-year start dates. The beneficiary of the 529 plan must also be the owner of the Roth IRA.

Another one is the 529 plan needs to have been established for at least 15 years. The contributions in the account need to have been in there at least five years before they are eligible to roll over. In order to make that eligible rollover, Roth IRA annual contribution limits and the child having earned income still apply. That child does need to be working and have earned income and can only contribute to the annual maximum for that year or the rollover can only be up to the annual maximum for that year. There is also a lifetime rollover maximum of $35,000. There are a lot of stipulations, but I think this is really important because even with those provisions, it's a way for parents to transfer tax-free wealth to their children.

Robert Brokamp: Yeah, whenever it's something like this comes out, these big laws, you'll find out that some of the language is not exact, and then over the next 12 months or so, the IRS and Treasury Department will clarify a few things. One thing that needs to be clarified is that normally with a 529, you can transfer the money to a qualifying relative. If you have leftover 529 money, can you transfer that money to a qualifying relative, which could be you, and then you take the money and put it in your Roth IRA? Right now the thinking is that's possible, but it's not certain so we were hoping for more clarification sometime over the next six to 12 months.

Alison Southwick: All right, the next one we're going to talk about is changes to required minimum distributions.

Robert Brokamp: Yeah, so the original Secure Act bumped up the starting age for required minimum distributions, or RMDs as they're called, from retirement accounts from 70.5 to 72. This 2.0 version pushes that age back to 73, starting this year 2023, then to 75 starting in 2033. Another way to put this, is that effective immediately RMD age is 73 for those born between 1951 and 1959, and age 75 for those born in 1960 or later. The bottom line is that folks can let their money grow a little longer on a tax-advantaged basis assuming they don't need it. In other RMD news before Secure 2.0, the only retirement account that was exempt from RMDs was the Roth IRA.

You had to worry about RMDs from traditional IRAs, traditional employer-sponsored accounts like the 401(k) and Roth employer-sponsored accounts. However, thanks to Secure 2.0, you don't have to worry about RMDs from Roth employer accounts starting next year, not this year, but next year. Why should you care about taking your RMD while the penalty for not taking an RMD was pretty steep, it was 50 percent of the amount you were supposed to take. That was among the highest penalties in the tax code. But starting this year, the penalty will be reduced to 10 percent or 25 percent depending on how quickly the air is corrected, so if you forgot to take your RMD, fix the problem as soon as possible and you may pay a lower penalty.

Alison Southwick: The third aspect of Secure 2.0 we want to talk about is updates to the annual catch-up contributions.

Stephanie Marini: I think one of the overarching themes of this bill is that it encourages savings and more ways to save. In this provision, it encourages savings through updates to annual catch-up contributions. These are the contributions that are for more experienced workers 50 and up, keep an eye on the years here because they do change. But starting in 2024, catch-up contribution limits to IRAs are now going to be adjusted for inflation. Instead of having that set $1,000 that can be added to the standard contribution limit, we should start seeing it move higher.

Then starting in 2025, additional contributions can be made in your employer retirement accounts of 150 percent of the standard catch-up contributions. This is for workers ages 60 to 63, and it will allow for, within those years, a higher amount to be considered as a catch-up contribution. Taking 2023 numbers, that standard catch-up rate is 7,500, which would make the additional allowable catch-up contribution to be 11,250. This change doesn't just help fix the problem today with just the last year of high inflation, but it keeps these figures relevant for coming years moving forward.

Robert Brokamp: Another interesting change about catch-up contributions that will take effect next year is that higher-income folks who are 50 and older, their catch-up contributions will have to go into a Roth account and the higher income means $145,000. If you earn $145,000 this year, next year when you make your catch-up contributions, they have to go into a Roth account. They think the reason for this was basically when money goes more into Roth accounts it raises revenue for this year, it's congresspeople basically wanting more money this year and not worrying about what happens down the future. The thinking on this is that it's for employees, self-employed folks will probably not have to worry about this.

Alison Southwick: All right, the next one that we want to talk about is employers can match student loan repayments.

Robert Brokamp: Studies indicate that people who graduate from college with debt have lower retirement savings than those graduate without debt and so not a big surprise there. A provision in Secure 2.0 aims to close that gap by allowing employers to match student loan repayments by making deposits in their retirement plan accounts starting next year. The match formula and the vesting schedule will be the same as if the employee had contributed to the 401(k) instead of making a loan payment. There are several requirements such as it has to be a "qualified loan" to pay for "qualified higher education expenses" for an eligible individuals so you can't just claim any old loan and say it was for school. Obviously, by the time it takes effect next year, some system will have to be created by which employees can prove to their employers that they're making payments on their qualified loans. It'll be interesting to see how that plays out. But for those who can't afford to save for retirement due to student debt, this at least gets them started.

Alison Southwick: All right, next one we're going to talk about is reduced penalties and ways that they're going to try and encourage savings.

Stephanie Marini: The Secure 2.0 Act also helps address now well-known statistic that most Americans cannot afford an unexpected $400 expense. Beginning in 2024, investors will be able to take early emergency distribution of up to $1,000 to cover any unforeseen financial needs and avoid the usual 10 percent penalty. This is just one of the ways that the Secured 2.0 Act is reducing some of these penalties to help encourage more savings. The distribution can be repaid within a three-year period, but no further distributions are allowed in that three-year period until the previous amounts are repaid.

Robert Brokamp: They only going to add to this too, it's only for non-highly compensated employees, and that definition somewhat changes year to year, but the higher-income employees won't be able to do this.

Alison Southwick: All right, and the last one we're going to talk about is that employer-matching contributions can be deposited into Roth accounts.

Robert Brokamp: Yeah, before this latest version of the Secure Act, all employer matches to retirement accounts had to be deposited in pre-tax traditional accounts so the money would then grow tax-deferred. But then withdrawals would be taxed as ordinary income. However, starting this year, employers will be permitted to allow their employees to choose to have the matched deposited in a Roth account, which would make future withdrawals are tax-free, and while that sounds great. It's not necessarily a free lunch because that match would be considered taxable income to the employee.

For example, if you received a $5,000 match from your employer and you chose to have it put in the Roth account, your taxable income would be higher by $5,000, which of course would increase your tax bill. But if you're in a low or even middle-range tax bracket, it could still be the right move if you expect your tax rate to be higher in the future. The other thing I'll add is that while this is effective immediately, employers don't have to offer it. Plus it's going to take a while for plan providers and employers to update their systems and their websites and things like that in order for this to beat logistically possible.

Alison Southwick: Well, thank you, Stephanie and Bro, now I get to come in with the closing caveats. This wasn't an exhaustive list. There are many more provisions that we didn't cover from the Secure 2.0 Act, your mileage may vary. Additionally, many of the details, as you mentioned at the top of the show, will be tweaked and worked out over the coming months. If there's a provision that piqued your interest, make sure you track down the latest information before you take any action. 

Chris Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy yourself stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.