Exclusive: Goldman team uses retail
deposits for Wall Street-style profits
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[September 13, 2016]
By Olivia Oran
NEW YORK (Reuters) - As Goldman Sachs Group
Inc <GS.N> has built its U.S. consumer bank, it has established a team
to put its deposits to work on Wall Street, a telling development about
Goldman's ambitions for the retail bank.
Led by 40-year-old Goldman partner and credit trading veteran Gerald
Ouderkirk, the team's job is to use consumer deposits and other types of
funding for trades, investments and big loans to earn profits, people
familiar with the matter told Reuters.
The existence of the team, which has not been previously reported, was
set up in mid-2015 and is formally known as the institutional lending
group. Lately, it has ramped up activities as Goldman Sachs looks to do
more lending broadly.
Some Goldman executives bristle at the idea that Ouderkirk's team is
similar to chief investment offices, or CIOs, at bigger banks such as
JPMorgan Chase & Co <JPM.N> and Bank of America Corp <BAC.N>, since
Chief Financial Officer Harvey Schwartz and Treasurer Robin Vince still
manage the bank's day-to-day liquidity, including how much capital
Ouderkirk gets to work with.
Goldman spokesman Andrew Williams declined to comment or make Ouderkirk
available for an interview.
Goldman became a bank holding company at the height of the financial
crisis in 2008, as did rival Morgan Stanley <MS.N>. Although Morgan
Stanley started moving toward traditional lending activities after
agreeing to acquire Smith Barney in 2009, Goldman's progress has taken
longer.
For years, bank officials denied any intent to transform Goldman Sachs
into the sort of bank that dealt with Main Street consumers. They argued
Goldman's bank would only cater to the wealthy individuals and
corporations that had long been its client base.
But management's thinking has evolved as regulators have pushed the
industry to get back to the basics of banking, said the sources, who
were not authorized to discuss strategy publicly. For Goldman, deposits
also represent a more stable and stickier type of funding than other
types of short-term debt it has relied on historically.
Steven Chubak, an analyst with Nomura, said he believes Goldman's
business model is still tethered to institutional clients, but "given
the regulatory pressure, any efforts to diversify revenue stream are
sensible."
Last year, Goldman announced it would buy GE Capital Bank's U.S. online
deposits. It plans to roll out an online lending platform for retail
customers later this year. The firm's deposits now total $123.7 billion.
Named Marcus, after 1869 founder Marcus Goldman, the online lender would
offer consumer loans of a few thousand dollars, and would surely expand
the loan book. But Ouderkirk's team, which may put millions of dollars
on the line with each transaction, may play a bigger role in increasing
the profitability of Goldman's bank.
BOOSTING MARGINS
Ouderkirk joined Goldman in 1998 and made a name for himself structuring
profitable bets against the mortgage market in the run-up to the
financial crisis.
Known as Jerry, he most recently served as co-head of global structured
credit trading.
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A screen displays the ticker symbol and information for Goldman
Sachs on the floor of the New York Stock Exchange (NYSE) February 9,
2016. REUTERS/Brendan McDermid/File Photo
Ouderkirk became head of the institutional lending group last
August. He oversees a team of around half a dozen people and reports
to Stephen Scherr, who is CEO of Goldman's U.S. bank and chief
strategy officer of the broader company.
Ouderkirk has been coordinating with executives across Goldman's
merchant bank, investment bank, private bank and trading desks to
find ways to use Goldman's balance sheet most profitably.
For example, Goldman's real estate group might have a client in need
of a multibillion-dollar commercial mortgage to buy a building.
After underwriters vet the borrower, Ouderkirk's group might offer
deposits to fund it. Some of that debt would be distributed to
outside investors, but Goldman's bank would retain a slice of it to
earn interest income.
Boosting that income is especially important for Goldman Sachs,
which is now earning scant profits from its deposits and facing
challenges in other big businesses, like bond trading.
Goldman generated a net interest margin of 1.25 percent in the
second quarter, the second lowest among the top 30 banks by asset
size, according to Federal Deposit Insurance Corp data. That metric
is an important one for banks, showing the difference between the
interest they pay for funds and the interest they earn from loans.
The average net interest margin for all U.S. banks is around 3
percent. Morgan Stanley, Goldman's closest peer, has a margin of
1.78 percent.
Before Goldman set up the institutional lending group, a committee
of senior executives from across the firm had to approve large
financial commitments. But as its bank has grown, and the volume of
loan approvals has risen substantially, it became evident that a
separate group was needed in addition to manage the task, people
familiar with the matter said.
Goldman's institutional lending group is still in its infancy, and
it is unclear whether regulators had any say over its development. A
spokesman for the U.S. Federal Reserve, Goldman's prudential
regulator, declined to comment.
(Reporting by Olivia Oran in New York; Editing by Lauren Tara
LaCapra and Grant McCool)
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