Step Aside London Whale: Goldman Is Now Using Retail Deposits To Fund Investments

Tyler Durden's picture

One month ago we last checked in to see how Goldman's brand new FDIC-insured depositor operation was doing: we were surprised to find just how much of a success it had become. As we reported at the time, by mid-August, Goldman has netted $1.8 billion in new deposits thanks to its overly generous 1.05% interest rate which is among the highest on offer anywhere. Some 33,000 people who’ve opened accounts, although since Goldman does not have any retail branches or ATMs, these new depositors can’t write checks from their accounts or take cash out of ATMs.

The immediately following logical question was why does Goldman need this cash?  We put forth that "maybe Goldman is simply prudent, and realizes that if the Fed is forced to drain some $2.2 trillion in reserves, bank cash balances will collapse to just a few hundred billions, as we have shown in the below chart netting out excess reserves from bank cash balances."

To be sure, the moment when the Fed begins selling down its balance sheet and withdrawing reserves is still years away, if it ever comes. Which took us back to the original question:

"why tempt depositors with such abnormally high rates of interest? We ask, because the last time a "healthy" bank was such a substantial outlier to its peers (a JPM High Yield checking account currently yields about 0.01%) it ended up tempting depositors with a [Spiderman towel] before it had to be bailed out."

Today, we got the answer. According to an exclusive investigation by Reuters, Goldman has been using the proceeds from the new deposits to directly fund speculative activity such as trading and investments, as well as more conventional activity such as creating looans. According to Reuters, Goldman Sachs built up its consumer bank, it 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.

More curiously Reuters points out 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 and Bank of America Corp, 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.

What Reuters means here is that quietly Goldman has been incubating its own "New York Whale" division. Recall that JPM's infamous "London Whale", which blew up spectacularly in 2012 after trying to corner a part of the debt market, did so using the bank's excess deposits as investible dry powder.

 

Our latest take on how JPM's CIO used retail deposits to fund trades in a 2013 article titled "This Is What JPMorgan's London Whale Office Is Investing Your Deposits In Now." It is now Goldman's turn to use low-cost retail deposits as initial margin with which to try to corner various aspects of the bond or stock market.

As Reuters writes, Goldman became a bank holding company at the height of the financial crisis in 2008, as did rival Morgan Stanley. Although Morgan Stanley started moving toward traditional lending activities after agreeing to acquire Smith Barney in 2009, Goldman's progress has taken longer. However, 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.

They changed their mind, and as Reuters adds, management's thinking evolved as regulators have pushed the industry to get back to the basics of banking. 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. Not to mention cheaper, now that short-term sources of unsecured funding have jumped following the recent moves higher in Libor.

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. According to Reuters, Goldman's deposits now total $123.7 billion, which however includes both retail and institutional amounts.

Who is the man who was tasked with developing Goldman's CIO?  "Jerry" 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. 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.

Goldman, which 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 FDIC data, is interested in boosting its all in return from borrowing and lending. 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.

As a result, it will take deposits on which it pays 1.05% interest and hope to invest them into products that generated far greater returns.

As Reuters reports for the first time, 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.

To be sure, using deposits to merely fund loans is nothing new or spectacular: it is a bank's bread and butter. It is what JPM's CIO was supposed to be doing... until the "tempest in a teapot" incident turned out to be vastly worse and almost led to Jamie Dimon's ouster several years ago as a result of various Congressional hearings.

Now it is Goldman's turn to take what is supposed to be a relatively riskless interest and maturity transformation, and in its yield for returns, level up deposit cash, and transform it into some heretofore unseen financial product which will blow up in a never before seen, and truly spectacular fashion.

Finally, for those wondering where the regulators are, the answer is nowhere: 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.

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Rainman's picture

Clinton-Gramm-Leach-Bliley Act 1999 , bitchez !!

hedgeless_horseman's picture

 

So my money gets vaporized and all I am left with is a Spider Man towel?

Corzine approves!

Here2Go's picture
Here2Go (not verified) max2205 Sep 13, 2016 9:41 AM

Have no fear folks... When it all goes tits up, another trillion dollar taxpayer funded bailout ought fix things to avoid tanks in the street.

hedgeless_horseman's picture

 

It's good to be a bank!

It's very-fucking good to be a bank and a market maker!

Here2Go's picture

Mazel Tov!

hedgeless_horseman's picture

 

 "So you got to be Johnny on the spot with the ammo, or we're dead."

Kirk2NCC1701's picture

You're on a roll 2day, HH.

I'd be happy to provide them both with ammo. Via 'Luftpost'. Five Seven or 6.5 by 25 CBJ. Just to be helpful, you understand.

PAPA ROACH's picture

Thank you William Jefferson I-did-not-have-sexual-relations-with-that-woman Clinton, for repealing Glass Steagall. Reaping those 'benefits' right now.

InflammatoryResponse's picture

What movie was that from?

it is familiar. :)

 

Four chan's picture

they learned this technique from the clinton foundation.

ConnectingTheDots's picture

Thank you Bill Clinton and Phil Gramm. This is your legacy to the American people.

Occident Mortal's picture

Isn't taking deposits and making loans... EXACTLY WHAT A BANK IS SUPPOSED TO DO?

hedgeless_horseman's picture

 

From the article...

"To be sure, using deposits to merely fund loans is nothing new or spectacular: it is a bank's bread and butter. It is what JPM's CIO was supposed to be doing... until the "tempest in a teapot" incident turned out to be vastly worse and almost led to Jamie Dimon's ouster several years ago as a result of various Congressional hearings."

ParkAveFlasher's picture

Flash a nice set of cufflinks, no worries.

GunnerySgtHartman's picture

Not just "loans," the assumption being commercial loans, but trading and investments.  This is the kind of nonsense that contributed to bank failures in the 1930s and wound up being prohibited by Glass-Steagall.

This will NOT end well.  Moral hazard, indeed.

Kirk2NCC1701's picture

It's good to be a Self-Chosen people. Then you're always "doing God's work".

p.s.

Every secular robber-baron or warlord needs a cleric, to justify their actions, thievery and even bloody deeds. It's been like that four thousands of years.

Aliens of all sorts (Kazarian, ME, and space aliens) are laughing their butts off.

two hoots's picture

The Federal Reserve, under the supreme guidance of Janet Yellen and being proactive, is all over this given their requirement to supervise banks (Wells Fargo???). Expect only the highest standards from those responsible for protecting our livelyhood and the value of our money.

rejected's picture

I would think speculative activity (gambling) is a bit different than secure loans. no?

King Tut's picture
King Tut (not verified) ParkAveFlasher Sep 13, 2016 9:25 AM

This is like GMAC bank in 2008 offering a higher interest rate than everyone else right before GM went tits up

cheka's picture

good eye kt.  others gasping last breath did same.  goldman though gets to leverage a deposit how many times? 

The central planners's picture

In the land on the negative rates, 1% its the new king. 

E.Shackle.Ton's picture

Isn't this the type of thing that Corzine was doing at Global?

smokintoad's picture

1946: George Bailey: I don't have your money. It's in Tom's house...and Fred's house.

2016: Lloyd Blankfein: I don't have your money. It's.....


Madcow's picture

Orindary people have not yet figured out that Western governemnts plan to "fight deflation" by stealing everyone's money, outlawying cash and raising interst rates. 

 

SomethingSomethingDarkSide's picture

I think they need a couple credit cards and some late fees, while we're at it!

Jus7tme's picture

I posed this question in March when Cihase (= JP Morgan?)  started maling  out those open-two-accounts-and get-$500 offers. Something fishy is going on, definitely.

The question is: Why are several big banks suddenly so desperate for deposits since QE ended?

GunnerySgtHartman's picture

They're chasing yield due to artificially-low interest rates.  The banks are looking for new money they can use to pump into investments.

Farmer Joe in Brooklyn's picture

This is fucking insane.  Moral hazard from the bailouts. 

These cunts offer high rates on deposits and gamble the proceeds.  If the gamble fails, bailouts.

I'm ready for the collapse. Time to roll out the guillotines...

King Tut's picture

The pathetic part is we're talking about people risking their savings for a few hundred/thousand bucks a year in intetrst gains . I see a lot of seniors lining up to give GS their $.

hedgeless_horseman's picture

 

This is fucking insane.  Moral hazard from the bailouts. 

It is NOT insane.  

It is by design.

Evil?  Sure.

Not insane.

Kirk2NCC1701's picture

Guillotines or hangings are too swift and painless.

It's either the Fargo Chipper or the Musollini Piñata for these scum of the earth, and all the misery and bloodshed they caused.

Dr. Engali's picture

No worries, Hillary's body double will fix everything when she is selected for president.

medium giraffe's picture

Fucking Corzined. 

adr's picture

Is this supposed to be news?

That is why they filed to become a bank holding company in the first place. Of course every other company had to open branches and put ATMs all over the place, but not Goldman.

You think a Tribesman sees your money as your money once it gets in his vault?

IT'S ALWAYS BEEN HIS MONEY, YOU JUST BORROWED IT!!!!!!!

khakuda's picture

The interesting part to this, if true, is that they are using FDIC insured assets to speculate.  If it blows up, the other FDIC member banks, goverment/taxpayer will get the bill.  This is exactly what shouldn't be happening - taking insured bank deposit and speculating.  That said, it all depends what they are doing.  The corner bank that takes FDIC insured deposits  and loans it to local businesses and home buyers is taking risk, too.  All a matter of degree.

gregga777's picture

Conporations are nothing more than organized criminal enterprises operating with the full approval of the United States government and the Democratic–Republican Party political parasite scum.

Conporations, especially the banking gangsters and Con Street swindlers, own the Feral government and the US Department of Corruption & Injustice lock, stock and barrel.

The exceedingly corrupt Feral Bureau of Intimidation is nothing more than the national political police charged with protecting the scams, swindles and crimes of the status quo.

Catullus's picture

You're loaning Goldman money at 1%. So they can make 7% before it blows up and you're stuck holding the bag. Along with the US taxpayer.

robertocarlos's picture

Well it is Goldman's money as soon as you deposit it.

bada boom's picture

How very Corzinesque.

spanish inquisition's picture

Don't worry, Goldman's is protected. The wrote derivitives to themselves using the deposits as collateral. They will be first in line should anything go wrong.

BabaLooey's picture

Until a upper management banker is indicted for this shit, and whole LOT of other shit, is tried, convicted and goes to PRISON....

NONE of this shit is going to change.

None.

Kirk2NCC1701's picture

Indicted?  Are you from Never Never Land?

They won't be indicted. They need to "take a long walk off a short high-rise ledge".