64 Finance & economics The EconomistFebruary 1st 2020
1D
avid solomon, the boss of Goldman
Sachs, plans to spin discs at a party for
the Super Bowl. Ahead of that performance
dj d-Sol took centre stage at the bank’s
headquarters in Manhattan on January
29th. This was a new gig: he was laying out
a fresh vision for Goldman at its first-ever
investor day. Until recently its bosses did
not deign to join earnings calls, set finan-
cial targets or host investor days. But a de-
cade of malaise has made that imperious
attitude untenable.
The mythology of Wall Street is built
around the old Goldman playbook: mam-
moth deals, big bets and contrarian calls.
But in post-crisis finance, glamour is out
and stability is in. Services such as wealth
management and retail and commercial
banking used to weigh down the high-oc-
tane returns that investment banking
churned out. Today, bank bosses see these
businesses as steadying ballast. They
smooth out profits and, by attracting low-
cost funding, make investment banking
more competitive. Goldman was slow to
catch on; but now it wants to be more like
its stodgier peers.
An investor who bought shares in Gold-
man in 2010 has had a disappointing de-
cade. Back then its return on equity (roe)
was 11%, easily beating the 8% average for
“bulge-bracket” American investment
banks, a group including JPMorgan Chase
and Morgan Stanley. By 2019 the average
roe was 9.7%, and Goldman’s was 9.2%.
The share price has lagged both the stock-
market and other big banks (see chart).
Goldman hopes to catch up by focusing
on two goals. The first is to expand market
share in services such as wealth manage-
ment and to offer easy access to “alterna-
tive” investments in private equity, private
debt and real estate. The second is to make
the existing business more efficient. The
bank’s chief financial officer, StephenScherr, sketched out how prosaic func-
tions, like transaction banking—process-
ing payments and managing cash for cor-
porate clients—and running a digital
consumer bank, could reduce funding
costs because they attract deposits.
The bank has already taken steps to div-
ersify. It launched Marcus, a digital con-
sumer-lending and deposit-taking arm, in- In 2018 it acquired Clarity Money, a
personal-finance app, in order to broaden
its retail offering. Last year it expanded its
wealth-management services by acquiring
United Capital, an advisory platform for
wealthy (but not uber-rich) investors. The
bank is consolidating all of its “alternative”
investments into one client-facing arm.
Alongside Goldman’s goals come con-
crete targets. It wants to amass inflows of
$100bn into alternatives in the next five
years. It also hopes to collect $50bn in de-
posits in its transaction-banking business,
a service that has not yet launched and of
which Goldman itself is the first client.
And it wants to increase the deposits in
Marcus from $60bn to $125bn. The more
wholesale funding is replaced by deposits,
the more funding costs fall. All these busi-
nesses have become critical for banks
wanting to be competitive in trading secu-
rities, including bonds and currencies.
New regulations penalise trading desks
that engage in complex activity.
Goldman also wants to be leaner by cut-
ting $1.3bn of annual costs. JPMorgan and
Bank of America have “efficiency ratios”—
which measure the expenses associated
with generating revenues—in the region of
55-60%. Last year Goldman’s was 68%. Di-
versifying and cost-cutting could push the
ratio below 60%, says Steven Chubak of
Wolfe Research, an equity-research firm.
Several hurdles complicate Goldman’s
transition to a new business model. For all
the talk of diversification, half of Gold-
man’s capital is locked up in its trading
businesses, which earned a paltry 7% roe
in 2019. The adaptation of this business to
the new regulatory regime has not so far
been smooth. Goldman built an enor-
mously clever and complex model to allo-
cate capital requirements on a per-trade
basis. But its rigidity meant the bank
missed consistent business from regular
clients, which is profitable overall.
The firm also awaits penalties for issu-
ing $6.5bn-worth of bonds for 1mdb, a Ma-
laysian investment vehicle from which
$4.5bn vanished. The scandal has tar-
nished Goldman’s reputation; the fine, ex-
pected to be in the region of $2bn, will
weigh on its profits.
All this will require managing cultural
change. Half of the newest crop of analysts
are women, and two-thirds from ethnic
minorities—a shift from Goldman’s usual
demographic. In September the Wall Street
Journalreported tensions between the old
guard and the new, with an eyebrow-rais-
ing 15% of partners expected to leave in
2019 (though Goldman says the attrition is
normal). The challenge is to respond to the
pressures that threaten Goldman’s profit-
ability without spoiling the secret sauce
that made it so successful.^7NEW YORK
Earnest, nice to clients and deferential to shareholders: Goldman Sachs bets the
firm on a new identityInvestment bankingTurntable
Vampire squibSource: Datastream from RefinitivTotal returns, January 1st 2010=100JPMorgan ChaseGoldman
SachsWells FargoCitigroupMorganStanley
2010 12 14 16 18 200100200300400Finance internship:The Economistinvites
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http://www.marjoriedeane.comF
or those seeking to help the worst-off
in poor countries, the mobile phone has
been a magic wand. Mobile-money ac-
counts have helped deliver “financial in-
clusion”—making financial services acces-
sible to the tens of millions with a phone
but no bank account. But they have down-
sides too.
The most obvious way digital financial
services harm poor people is by laying
them more open to fraud. Research from
2016 cited in a new report by the Consulta-
tive Group to Assist the Poor (cgap), a con-
sortium of donors affiliated to the World
Bank, found that in the Philippines 83% of
people surveyed had been targets of mo-
bile-phone scams, with 17% losing money.
In Tanzania, 27% had been targeted and
17% fleeced; in Ghana, 56% and 12%.
For the most basic deceptions, a thief
needs only a phone number. A text mes-How digital financial services can prey
upon the poorPoverty and privacyHidden costs