Today, this is a modest move that will deliver only minor returns next to its investment banking and trading divisions. Yet over the long term, it represents a significant shift in direction as Goldman and other banks are forced to adapt to new regulations and ongoing market turmoil. Executives hope to raise $100 billion in loans, up from $12 billion at the end of March.
The firm is revving up its lending to Goldman's wealth-management clients and other wealthy individuals. Rather than merely advising them on where to invest and offering investment funds, Goldman is now starting to collect their cash in the form of deposits and make loans to them for homes, art, boats and the like.
Is this a good move for Goldman? What does this shift mean for the banking industry as a whole?
This move makes sense. As European banks falter and pull back their loans, someone needs to step in and fill the gap. Goldman’s impressive client list puts it in the right position to do that. Deposits are also seen as a more stable source of funding compared with overnight funding, so this isn’t a particularly risky plan.
Goldman's traditional investment banking business is funded by borrowing cash, as needed, against the assets the bank holds on its balance sheet. Moving into a more traditional banking business of savings and loans will give the bank a more dependable, lower-cost source of funds for its other operations.
And keep in mind that this isn’t by any means a shift into retail banking:
The bank has no intention of opening bricks and mortar locations or rolling out a network of ATMs, the report said. Rather, it will simply increase the amount of money it loans and holds for its extensive network of wealth management clients. Those customers will have the option of maintaining deposits, even taking out a mortgage from the Wall Street firm.
Will this move eventually be enough to offset the decline in Goldman’s core investment business? Do you see any other banks pursuing similar strategies?
From a WSO standpoint: this means more intern opportunities for current students
The cost of capital has been rising substantially, and access to capital has been drying up of late, in the worldwide market. This has been a well documented fact that is affecting banks.
The Australian banks have been returning the best worldwide ROA, so it's natural oversees banks should seek to see what the Australian banks have been doing. Australian Big4 retail banks (unique because they such big players in Debt funding for Commercial ventures domestically) have typically managed to avoid being as largely affected by the GFC as the worldwide institutional banks, and as affected by the rising costs of funding because at times up to 60% of their capital is coming from the retail market, and they have been continuing this move over time. They did this because retail offers a very cheap form of funding for banks, with a very low interest rate paid to retail consumers. At one stage the retail banks were rated better than the IB's (at least in Australia), so they were able to source cheaper rates of finance, too.
By claiming it's not a switch to retail, GS can maintain the prestige of the firm. Of course they not going to be putting in ATMs or opening brick and mortor institutions etc, that would require more cash outlays for little return when they can utilise their current structures to perform the same duties. But yeah, it looks like retail banking, just PR (public relations) are spinning it as "exclusive" retail banking to hope that in a way we don't view it as such.
By limiting their services to individuals above a high net worth, they get access to the high levels of capital at a very cheap rate (when compared to other international funds sources), maximising their return while being limited to a very low number of serviceable clients and accounts they have to manage, which limits transaction costs. It also allows them to diversify their operations to limit some of their risk exposure, as for example, being locked into a fixed term mortgage to a long term high net worth individual tends to have less commercial uncertainty than the volatility shown in the international money market.
Furthermore, as you said, they are doing this due to changes to regulation, so it's a good move if they're complying with what they need to to avoid regulatory action taken against them and minimise risk exposure.
What they are doing makes sense, but I see it as partly retail banking.
This is a fucking retarded post on a fucking retarded article. GS has always had a private bank, and has always been happy to make loans to clients in exchange for business. That is the whole fucking point of banking.
The fact that you posted this here means some PR intern at GS managed to fuck with some intern at the WSJ, and you managed to give them some internet love so both can get a nice boner tonight.
Also, European banks are not "faltering and calling in loans." Those are two separate statements. The former is true, the latter is now, due to both the signalling mechanics of a bank run and the LTRO.
Finally, lending to UHNW clients is a horrible use of capital for an investment bank given that they likely don't need a mortgage, and will thus pay you minimal interest, while you have a 10%+ Tier 1 ratio and get bumraped by regulators every time you put capital anywhere that is not gov't bonds.
Oh, and also, your model of how GS is funded is so simplistic it borders on autistic.
In short, this post is a piece of shit.
Damn, calm down bro.
Wow, dude. Are you ok? Did your girlfriend break up with you right before you posted this? Had you just finished watching Schindler’s list? Are you a Cleveland Browns fan? Can’t think of any other reason you’d be acting like such a child. There’s a difference between responding to a post with reason and responding to a post for the sake of being a dick. I’ll try to do the former:
1) Of course making loans to clients in exchange for business is the point of banking. You are correct, and no one is disputing that. But historically this hasn’t been the main focus for Goldman. The point of the article is that Goldman Sachs, a bank that has historically taken a fair amount of risk, is opening up its private bank in a way that will substantially increase lending and minimize risk.
2) Falter: “to move unsteadily or in a way that shows lack of confidence.” European banks are faltering. This is a fact. Banks are also cutting lending and retrenching. They’ve been doing this for months (see here, here, and here.) Why are they doing this? Because of an unsteady economy and a lack of business confidence. I don’t see why you attacked my point here, because it sounds like you feel the same way.
3) That’s your opinion and in fact a good point. I respect that, no qualms there.
4) Common mistake here. See, when there’s one of these guys “______” around the paragraph, it means it’s a quote. As in I didn’t write it. So, while I’m sorry you find this point “so simplistic it borders on autistic”, I’d suggest you write to Yahoo News and take it up with them. Here’s their contact information.
Next time you open up your computer, just take 5 deep breaths, sing Kumbaya, and chill out.
steroid rage
sb for making me laugh
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