Goldman Sachs - Follow the Money
After 150 years of existence in the investment-banking field, the Wall Street titan is opening up its operations to the public by allowing for consumer online banking. The online saving accounts are offered at $1 on deposits, combing investment banking and consumer banking under one roof. In addition, “Goldman Sachs Bank is offering a range of certificates of deposit, from six months to six years. The six-month CD pays an annual percentage yield of 0.7 per cent, more than five times the national average”. Comparing this expansion possibility, the margins might look good at the beginning of the credit cycle but loan losses can quickly eat into those generous margins.
The reasons for this move are that banks are “under pressure to develop new streams of funding”. In addition, the “weak first-quarter results from the big US banks have highlighted the challenges faced by their investment banking units and the need for a solution. Goldman posted the lowest quarterly ROE of 6.4%, on an annualized basis of the past four years. An explanation for this low performance is that the bank is under pressure from volatile markets and tight regulations. Until now, Goldman Sachs has focused on wholesale funding sources and so-called “brokered deposits”, which are bulk sums that banks acquire from brokers in exchange for high interest rates. It is not the first time that the group has signaled a move away from its historic focus on institutional clients. Having been a pure securities firm up until the crisis of 2008, it was forced to become a bank holding company so that it had the possibility to get funds from the emergency Federal Reserve funding.
Form a future perspective, the introduction of the new liquidity standard by the Basel Committee in January 2015 which states that “deposits from retail customers are considered the least likely to vanish when problems arise” benefits consumers but can impact the firms stream of revenue. Other risks include a systematic one and one about its reputation. The systematic risk focuses on policymakers which have questioned the convention of allowing retail banks and investments banks to cross-subsidize each other. Restriction on this are in place in the UK (“forcing groups to segregate the funding of investment banking operations”) and in Switzerland, with a institutional version existing in the EU. However, in the US, universal banking is still continuing to persists due to the 1999 “repeal of the Glass-Steagall act””. This act refers to “four provisions of the U.S. Banking Act of 1933 that limited securities, activities, and affiliations within commercial banks and securities firms. The congressional efforts to “repeal the Glass–Steagall Act” referred to those four provisions being eliminated, causing the crisis of 2008, according to some critics, as it allowed banks to expand the list and volume of activities regulation to securities.
The threat for Goldman Sachs exists as a “possible reinstatement of Glass-Steagall, or some other crackdown”, has been a theme in the US presidential debates that might come into action soon. Lastly, Goldman Sachs “must overcome a reputation as an arrogant outfit that puts its own interests ahead of its clients’.”
WRITTEN BY PHILIPP MARTIES FOR BESA
PLEASE DIRECT ANY INQUIRY TO AS.BESA@UNIBOCCONI.IT