Goldman’s retail move follows the money

Goldman Sachs has long been too cool to put a nameplate on its biggest office buildings. But for how much longer?

For decades, a mix of discretion (if you’re a fan) and arrogance (if you’re not) has underpinned an investment bank that likes to hire the smartest people, serve the best clients, and make as much money as possible along the way.

Suddenly, though, Goldman is looking unsure of itself. Nearly a decade after the first flush of the financial crisis — and following a dire set of first-quarter results — the group is throwing itself into mainstream consumer banking.

As of last week, GS Bank is offering online savers an instant access account with no minimum balance and an interest rate, at 1.05 per cent, that is the best on the market. This is top-of-the-range mainstream marketing. But it is hardly consistent with the no-nameplate DNA.

So what is Goldman up to?

It is not the first time that the group has signalled a move away from its historic focus on institutional clients. Having been a pure securities firm up until the crisis, it was forced to become a bank holding company in order to access emergency Federal Reserve funding in 2008.

For years, this change merely added to its regulatory burden — to such an extent that, by 2011, there was talk that Goldman and rival Morgan Stanley were considering ditching their bank status, to escape onerous Dodd-Frank restrictions on activities such as proprietary trading.

That talk came to nothing. Then, last year, Goldman’s thinking on banking swung to the other extreme. Over the summer, it recruited Harit Talwar, a former executive at credit card company Discover, to lead a new lending business. It is now hiring for a string of other consumer loan roles.

At the same time, Goldman has also been lining up funding for its lending push. Its GS Bank initiative, bought from GE Capital, seems to be part of that. A 1.05 per cent savings rate (or 2 per cent on five-year certificates) is chart-topping, but still cheaper than the wholesale market where Goldman is typically paying 2.75 per cent for five-year money.

And, odd as it seems, the push does have something Goldmanesque about it.

First, Goldman is swimming against the tide, as it so often does, to great effect. At a time when many so-called universal banks, and their regulators, are questioning the model of serving investment and retail banking customers under one roof, Goldman is dropping monoline investment banking for universal banking.

Second, anyone who thinks Goldman is going soft on Wall Street’s belief in the goodness of greed will be heartened. Its new strategy is pure follow-the-money opportunism. It wants to replicate Discover, having seen quite how much money a business like that can extract from customers. If Goldman can borrow money at less than 2 per cent and lend it at up to 25 per cent, as Discover does, the appeal is obvious. Discover’s return on equity in the quarter to March was 21 per cent. Goldman’s was 6.4.

The risks, though, are large.

The first is systemic. Policymakers have questioned the wisdom of allowing retail banks and investments banks to cross-subsidise each other, and cross-pollinate cultural attitudes. In the UK, incoming ringfencing rules are forcing groups to segregate the funding of investment banking operations. Restrictions are also in place in Switzerland, and the EU may yet institute a version of ringfencing.

For now, universal banking in the US persists, thanks to the 1999 repeal of the Glass-Steagall act, though the likes of Bank of America Merrill Lynch (Q1 ROE: 5.4 per cent) are hardly thriving. A possible reinstatement of Glass-Steagall, or some other crackdown, has been a theme in the US presidential debates ahead of November’s election.

In the meantime, there are big risks for Goldman itself, however smart the group is renowned for being. Its entry into consumer banking takes it into an increasingly crowded arena populated by new-style peer-to-peer lenders as well as banks and credit card companies. Margins might look good at a benign point in the credit cycle but loan losses can quickly eat into those generous margins.

Most of all, Goldman must overcome a reputation as an arrogant outfit that puts its own interests ahead of its clients’. Getting a few nameplates might be a good first move.

patrick.jenkins@ft.com