Ten years ago, Goldman made a killing by betting - alongside some of its best clients such as John Paulson - against subprime Residential Mortgage Backed Securities (and their various synthetic and "squared" derivatives) and the various soon-to-be-bankrupt companies that lent money to subprime borrowers.
Now, a decade later, Goldman is once again hoping to profit off America's sub-660 FICO population, only instead of betting against subprime borrowers, it is lending to them.
That's right: Goldman is now a subprime lender itself, because through its retail-facing bank, which both collects deposits and issues loans, subprime borrowers have emerged as one of the most important client bases of the FDIC-backed hedge fund which until just 2 years ago had no conventional, retail-facing banking operations whatsoever.
However, as the contribution of prop, flow and FICC trading - historically Goldman's bread and butter - to the company's revenue declined as trillions in central bank liquidity removed risk and volatility from markets, Goldman was forced to find alternative revenue streams. As a result, over the past year and a half, Goldman built out a digital banking arm which it acquired from GE Capital Bank, and now has about $20BN in deposits and $2.4BN in unsecured consumer loans. The new business, named Marcus and which we profiled previously, is a key part of the bank’s plan to increase annual revenues by $5bn by 2020 after several years of lacklustre growth from its core businesses serving big companies, big investors and ultra-rich clients of its private-banking arm.
And herein lies the rub, because as the FT reports citing analysts, Goldman has been targeting riskier borrowers, supplying about one-fifth of its loans to people with credit scores below 660 on the commonly used FICO scale; there is a familiar name for this group of borrowers: "subprime."
And as Goldman's own balance sheet exposure to subprime has grown, analysts are wondering if the bank is setting itself up for big losses down the track, as deja vu strains are once again emerging in the $3.7tn US consumer debt market, where subprime loan losses on autos have already surpassed the financial crisis record, and where credit card delinquencies are now the highest they have been in the past 6 years.
Addressing these concerns at Goldman’s annual meeting in Jersey City on Wednesday morning, Lloyd Blankfein accepted that “a poor credit environment” could bring new risks, but said that the 149-year-old bank was not too concerned with “timing” its entry into retail banking; he was referring to the fact that according to Morgan Stanley, Socgen, the IMF and virtually everyone else, the US economy is already very late cycle.
“We intend to be in the [consumer-focused] business for the long-term and we have to manage it through all points,” he said, responding to a shareholder’s question about the revenue plan announced last year. “We’re in the ninth year of a favourable cycle; five years ago, we might have waited for a better time to get into it, at a down part of the cycle, but we haven’t had that yet. So we take our risk accordingly.”
Quoted by the FT, Blankfein said Goldman was “being very careful” in its development of Marcus, “growing very slowly and deliberately with a lot of controls”, so that people do not take out loans they cannot afford to pay back.
He emphasised that so far, the digital bank has focused on supplying loans to replace balances held on credit cards, which tend to have “substantially” higher rates of interest.
“That is a win/win,” he said, “recognised by a community of people generally concerned with public welfare.”
Apparently, people like Lloyd are generally concerned what people who are generally concerned with public welfare, think.
Ironically, while Goldman's equity trading desk enjoyed its best quarter on record in Q1, largely thanks to the "one-time" volatility explosion on February 5, shareholders were less curious about the fate of Goldman's high margin FICC operations, and far more curious about how Goldman plans to grow out "Marcus" and the strategic shift it implies.
Sister Barbara Aires of the Sisters of Charity of St Elizabeth, who was representing the Unitarian Universalist Association, asked Mr Blankfein to shed more light on the growth plans, noting that the bank had recently recruited an Instagram personality — JoJo Fletcher, a former Bachelorette contestant — as a spokesperson for its home-improvement loans.
Yes, Goldman has sunk so low that it hired a former "bachelorette" contestant to sell subprime loans.
It gets worse, because as it turns out, the Goldman of 2008 would be buying up every CDS it could find on the Goldman of 2018. And so, in delightful irony, Goldman has become the very company that just ten years ago it wanted nothing more than to short into oblivion.
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And now, here are some more photos of JoJo to make all-red blooded Americans rush to their nearest Goldman branch and take out a loan.