Goldman Sachs Embraces Lending's Bland Side -- WSJ -2-

By Liz Hoffman Features Dow Jones Newswires

The investment bank, seeking growth beyond its elite turf, turns to lending; takeovers to remodels

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Goldman Sachs Group Inc. earned its elite reputation by dominating the glamorous end of finance -- investment banking, trading and managing money for the wealthy.

In the postcrisis world of Wall Street, however, these standbys aren't providing the kind of growth it wants. So Goldman is expanding its reach with a prosaic strategy it once avoided.

Lending people money.

The firm has been opening its checkbook for the past several years to finance corporate takeovers, lend against mansions and art, and make personal loans for things such as kitchen remodels and fixing broken windshields.

It is exploring new credit businesses such as trade finance, equipment leasing and extending credit that consumers use for online purchases, according to people familiar with the discussions.

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"We're a bank," Chief Executive Lloyd Blankfein said in a February interview. "We should act like one."

That Goldman is branching out, after long sticking to its knitting as rivals diversified, shows the challenges facing Wall Street this decade. Investors have been rewarding firms with diverse businesses that churn out safe, if smaller, profits. Most in the finance industry believe trading revenues will never return to precrisis levels.

Goldman ranks among Wall Street's top players in its core businesses, such as advising on corporate mergers and underwriting stock sales, offering little room for growth. In lending, "we can only go up," said Stephen Scherr, who oversees the effort as CEO of Goldman Sachs Bank USA.

Loans outstanding across Goldman have doubled to $95 billion since 2011, filings show. Real-estate loans are up 10-fold. Business lending has tripled, while loans in its private-wealth division, secured by everything from stock portfolios to rare artwork, have quadrupled. Goldman doesn't report revenues tied to lending, which remains a small part of its overall business.

"It's not quite Bailey Savings & Loan," said Glenn Schorr, a research analyst who covers banks, "but it's getting closer."

Cultural shifts

The pivot has brought cultural shifts to a firm ruled by hard-charging deal makers and traders. Mr. Scherr recruited executives from finance arenas foreign to Goldman's world -- from Discover Financial Services, Capital One Financial Corp., regional banks and online lenders.

Into a firm known for courting the financial elite, he hired executives skilled at selling to the masses -- from underwear retailer Jockey International, food-delivery app GrubHub Inc., concert promoter Live Nation Entertainment Inc. In January, Goldman reorganized several hundred employees into a new division reporting to Mr. Scherr named Consumer and Commercial Banking.

Some Goldman investment bankers have privately grumbled at being cast as small-town lenders. Other current and former executives say the push is misguided, exposing Goldman to a new risk -- the American borrower -- in hopes of collecting a few nickels on the dollar.

Goldman's lending push comes as the financial system is awash in capital and demand for new loans is starting to flag. What's more, entrenched lenders such as Citigroup Inc. and J.P. Morgan Chase & Co. have deep relationships with CFOs and treasurers, who typically decide which banks to borrow from. "When you need money and you pick up the red phone, it goes to J.P. Morgan, Bank of America, Citi," said Tom Deas, former treasurer of chemicals maker FMC Corp. and now chairman of the National Association of Corporate Treasurers. "That will be slow to change."

Last month, Goldman got a reminder of why it must find new ways to make money. Its trading desk stumbled badly, reporting weak quarterly numbers that Chief Financial Officer R. Martin Chavez said "served as a reminder of the benefits of having a diversified global client franchise."

Goldman's push to lend -- still in its early days -- further blurs the lines that separated investment banks like it from commercial banks. The former made money on their wits, brokering deals and trading securities; the latter took depositors' cash and lent it, pocketing the difference.

Goldman began as a lender. In the 1870s, its immigrant founder Marcus Goldman sold short-term credit known as commercial paper to merchants along Manhattan's wharves, tucking the bills into the band of his silk hat.

As the firm grew, it focused on brokering deals and trading big slugs of stock, arenas where the fees were larger and the field less crowded. Goldman's specialty was turning over capital quickly, squeezing profit from the same dollar again and again. By contrast, lending money locked it up for years.

"We were in the moving business," Mr. Scherr said, "not the storage business."

After Congress in 1999 repealed a Depression-era law that had kept the two separate, J.P. Morgan, Citigroup and other commercial banks barreled into Goldman strongholds such as trading and underwriting, where margins were fatter.

Goldman decided not to reciprocate and challenge its commercial cousins on their turf. It lacked a big cache of retail deposits to fund loans cheaply, and its executives tended to view lending as pedestrian and commoditized -- a business built on brawn, not brains.

While rivals sent armies of lending specialists to Main Street, Goldman's M.B.A.s and Ph.D. "quants" stuck to doling out high-touch services to companies, hedge funds and governments. The firm rode one Wall Street wave after another to huge profits -- institutional stockbroking, the dot-com rush, the explosion of financial derivatives, the private-equity boom.

It did make occasional loans, principally to wealthy or corporate clients it hoped to keep close.

The first seeds of change were sown over a hectic September 2008 weekend. With its shares tanking and clients pulling cash, Goldman ceased to be an investment bank. Under pressure from the Federal Reserve, it legally converted to a commercial bank, gaining access to cheap government cash that calmed panicky investors.

Goldman welcomed the lifeline but had little interest in retail or commercial banking. Some executives debated trying to shed the firm's new status, which had brought additional federal oversight. The newly created banking entity sat mostly empty.

The postcrisis world proved a harder place to make money, amid new regulation, a global recession and low interest rates. Bond-trading revenues, a huge driver of profits, fell to $8.7 billion in 2013 from $21.9 billion in 2009. Mr. Blankfein, CEO since 2006, began pushing executives to find ways to grow.

Some floated the notion of moving into traditional lending, but there was still resistance. David Viniar, Goldman's long-serving chief financial officer, was skeptical of lending, according to people familiar with Mr. Viniar's position. He kept a toaster in his office as a reminder of Main Street banking gimmicks to avoid. Mr. Viniar left the post in 2013, remains on Goldman's board and supports the firm's current efforts.

At a management off-site in the Hamptons in the summer of 2014, executives batted around ideas for growth, according to people familiar with the meeting. Some made a case for looking for new revenues by using Goldman Sachs Bank USA, the legal entity created at regulatory gunpoint in 2008.

Goldman was being regulated like a Main Street bank, they argued, but wasn't reaping the benefits. What's more, they said, politicians had many Wall Street activities in their crosshairs but tended to view lending as a social good, helping small businesses thrive and families make ends meet.

"The feeling was that nobody was going to get hauled in front of Congress" for writing simple loans, one executive remembers. Several Goldman officials had testified in Washington about the bank's crisis-era mortgage-trading activities, a scarring episode for the firm's image.

The new team

Mr. Scherr, whom Mr. Blankfein tapped to lead the effort, began assembling a team. He recruited Harit Talwar from Discover, the credit-card giant, and Dustin Cohn, Jockey's head of marketing.

Goldman launched a business last fall to make online loans of a few thousand dollars to individuals. Named Marcus, after Goldman's silk-hat-wearing, credit-selling founder, it targets borrowers carrying high levels of credit-card debt and offers to refinance at lower rates. It has lent about $1 billion in its first six months.

Years ago, Goldman would likely have "securitized" the loans, bundling them, slicing them up and selling the pieces. That would have freed up those loan dollars to be used elsewhere and earned lucrative fees for Goldman's traders. In perhaps the most striking sign of Goldman's newfound taste for plain-vanilla banking, the firm plans to keep the loans and pocket the interest payments.

"It's hard to get more boring than that," said Mr. Schorr, the analyst.

Goldman's lending push also extends into its investment bank, which advises companies on mergers and fundraising. It is the firm's second-largest division by revenue and its most profitable.

For decades, Goldman's investment bankers specialized in negotiating the sale of their clients to corporate buyers. Fees on the "sell side" are predictable, but usually lower than those earned by the acquiring company's banks, which raise debt to fund takeovers. Goldman earned $56 million for advising Botox maker Allergan on its 2015 sale; J.P. Morgan earned more than $200 million arranging a loan for the buyer, Actavis PLC.

Goldman has subtly pivoted in such deals, angling for a larger share of the fees that come from providing the money, not just advice, for deals. "That was the white space on the map," said John Waldron, who runs the investment-banking unit in the U.S.

In late 2015, when Goldman's top retail-industry banker, Kathy Elsesser, was talking to Newell Rubbermaid Inc. about buying rival Jarden Corp., she brought colleagues who specialized in raising debt to early meetings. Their message, according to people who attended: "We can do this. You don't have to go to" a big commercial lender.

The $10.5 billion check Goldman wrote Newell to finance the deal was the bank's single largest loan ever. That was topped last summer by an $11.4 billion loan commitment backing Bayer AG's acquisition of Monsanto Co. Goldman ranked third last year in arranging loans for U.S. deals, up from ninth in 2012, according to Dealogic.

Much of that debt is sliced up and sold quickly, so Goldman doesn't carry much risk. Overall, though, corporate loans held on the firm's books grew to $28.7 billion in 2016 from $15.0 billion in 2014, filings show.

Goldman is even entering the unsexy world of extending revolving loans, a form of rainy-day credit to corporate clients. It is one of the worst businesses on Wall Street because fees are low and companies tend to draw on the loans only when in trouble. Banks make these "relationship loans" in hopes of building client loyalty for better work later.

Goldman historically declined to play that game, even when marquee assignments were at stake. In 2001, it didn't participate in a loan Kraft Foods was raising. Some Goldman executives suspected it cost Goldman a coveted role on Kraft's IPO that year, then the second-largest in history.

That wouldn't happen today, said Susie Scher, Goldman's top banker for investment-grade debt. "It's a cultural shift," she said. "The mentality now is that we have to lend to support our clients."

Funding the firms' loans is a growing stash of deposits. Goldman for years financed activities by borrowing against holdings of securities, a strategy that left it exposed during the financial crisis. It branched out in 2016, buying an online savings-account platform from General Electric Co. and began taking retail deposits for the first time. Meanwhile, it has been gathering more of its corporate and wealthy clients' extra cash.

Deposits have increased to $124 billion in 2016 from $28 billion in 2008, still a fraction of J.P. Morgan's $1.4 trillion.

More lending initiatives are planned. Goldman executives have discussed adding trade finance, which companies use to import and export goods, and are looking for new ways to lend to individuals, perhaps by making car loans or advancing money for online purchases, people familiar with the firm said.

Still, it is slow going overall. When AT&T Inc. needed $40 billion in debt to buy Time Warner Inc., it called J.P. Morgan and Bank of America Corp. Goldman executives chafed at the miss, said people familiar with the bank, which left it out of 2016's biggest takeover.

There is also a danger that Goldman, hungry for market share, takes on risky assignments. Two financing deals for private-equity buyouts last year earned Goldman a formal reprimand from banking regulators who felt the companies would carry too much debt. A third was rejected by bond investors, who forced Goldman's client to pay a higher interest rate.

And lending to consumers can be risky, especially because Goldman is targeting those already heavily in debt. Goldman is entering the space amid new cracks in the market: Store-card issuer Synchrony Financial and Capital One both set aside hundreds of millions of extra dollars last quarter to cover an expected rise in credit-card delinquencies.

"If you are driven by investment-banking mentality, retail banking, in the main, is different," said Deanna Oppenheimer, who ran Barclays PLC's retail operations and now runs a financial-services consulting firm. "The products are simple, but the complexity is in the scale, and it's not a slam-dunk that they get that right."

Write to Liz Hoffman at liz.hoffman@wsj.com

(END) Dow Jones Newswires

May 02, 2017 02:47 ET (06:47 GMT)