Wednesday, April 27, 2016


Once upon a time, if you had a minimum of $10,000,000 cash money you could bank with Goldman Sachs.  Now you just need a buck.  Wha' happened?

Well, in a somewhat overlooked moment in time Goldman became a full service bank in 2009.  To collect the riches from retail banking?  Nah, to be eligible for a bail-out from the U.S. government as a result of the great crash.  It was as simple as that.  Since that time Goldman has been a banking institution regulated by the Fed and anybody else that can stick their finger in.  Then came Dodd/Frank.

I believe I wrote at the time that things were going to get rather sticky for firms like Goldman for a goodly piece of their business was trading and that was about to become highly regulated and very capital intensive.  No longer could a balance sheet show assets at the end of a reporting period of ten bucks but have a hundred bucks on board in the middle of the week.  Buying money was about to become very expensive due to increased reserve requirements and the money machine that was Goldman and in truth, many of the big institutions, was about to come under great pressure.  That is exactly what has occurred.

One of those other institutions was General Electric, for many years the darling of the stock market and of analysts.  In truth, for many years GE was not an industrial company but a bank; GE Capital provided the bulk of its earnings and was a force with which to be reckoned.  They were very good.  Enter once again Dodd/Frank the result of which was to force the decision on the part of GE management to rid itself of the financial arm except for that portion which interfaced with the industrial parent in the financing of its products.  I said at the time GE shareholders were taking it on the chin as the assets would probably not realize their true worth as the divestiture was more in the nature of a garage sale and while that might have been a slight overstatement, Goldman swooped in to  pick up a goodly share of what was on the block.

Goldman, one thought?  Yeah, Goldman.  Because they had figured that for the time being at least the       wholesale banking business was kaput and they needed a profit generator to keep the volk happy until sanity could return to the business.  They've had a pretty good sized retail business for a while now from the GE purchase so I wasn't surprised when they began offering this service which, being run by machines, is low overhead and--at least for now--designed to attract deposits only.  Keep in mind that deposits attract capital but RETAIL deposits are a lot less capital intensive than wholesale deposits under the theory that they tend to stick around in sticky times (2008) whilst wholesale deposits run away.  Not too far from their thought process as well was that the Street loves Wells Fargo because as a basic savings and loan it's simple, easy to follow and supposedly safe.  That's my take anyway.

A great deal was made of the fact that Goldman was going to offer an interest rate of 15 on the savings accounts when a depositor could only get 0.01% from, say, Wells at this time.  Well, you don't think Goldman is going to use those deposits to create interest differential income do you?  Hell, no. They are going to leverage them and stick them right back into their money-making business as quickly as they can or until Big Danny and his mob cotton on to this...assuming of course that somebody hasn't told Danny to look the other way.  Nobody ever said Goldman was dumb.  But there is a problem with all this with which I have had considerable experience...let's call it the "second class employee problem."

Goldman is a wholesale, transaction driven, high yielding, high paying shop.  Always has been, always will be.  Retail banking...even if done mostly by machines is a relationship driven, low yielding, relatively low paying business.  Put the two under the same corporate logo and you are asking for trouble.  Culture class is too benign a term to describe it.  If these guys are serious about attempting to integrate these cultures and expanding the retail side I will bow down before them if they make it work.  It is a hard, hard thing to do.  But of course if the world of banking is believed to face a future of increased regulation and limitations, perhaps it is the only way to go and not only Goldman but all the others out there may be facing the slow death of a business in which for years this nation was dominant.  Oddly enough, perhaps the only way to save it would be to do what so many practitioners have been arguing against; a return to the "good old days" prior to 1999 when there were no universal banks in the U.S.  Not because it's a good idea mind you but because what we have now won't work.  There's a thought for the day.  Feel the Bern.

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