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The Institutional Risk Analyst

© 2003-2024 | Whalen Global Advisors LLC  All Rights Reserved in All Media |  ISSN 2692-1812 

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So Goldman & Citi Like Retail Banking? Really?

New York | Last week, Goldman Sachs Group (NYSE:GS) held its long awaited investor day event. As GS says on its web site: “Our senior leadership team delivered presentations on the firm’s strategic priorities and how we are focused on driving shareholder value.”

The message was tight, the presentation polished as usual – but not entirely well-executed. GS made its treasured investors wait through hours of banal presentations before allowing any questions. The PPT runs to 263 glorious pages of investment bankster BS. There was even the required panel on “sustainability.”

The conversation between GS and investors could have taken 90 minutes and ten slides, but GS instead took a whole day from investors and still did not answer the question. What are you going to do with the business?

Images were conjured, horizons were illuminated. China, post corona virus of course, was dangled before investors as a possible revenue driver. GS talked about few tangibles during the presentations, but some were notable. Increasing FICC revenues, for example, while driving down funding costs by $250 million out of $13.5 billion in quarterly interest expense over three years.

No, talk to us about how much funding costs will rise in 2020. Fact is, GS is too small to be credible as a commercial bank and too big to just be a nonbank broker dealer. And still there is no talk – yet – about a transformational transaction to grow deposits and add real stability to the business.

Recall that of $1 trillion or so in total assets, GS has less than $70 billion in true core deposits. Compare that with U.S. Bancorp (NYSE:USB), for which we own the common and preferred, with half the assets, $400 billion in core deposits and among the lowest cost of funds of the top five money center banks. Yes, USB is a money center bank, GS is a customer of the larger banks.

Source: FFIEC

When GS talks about being competitive as a lender without growing the bank significantly – i.e hundreds of incremental percent of core deposits - that is your signal to call “bullshit” in a loud and clear voice. We’ve suggested acquiring Key Corp (NYSE:KEY) because of the $100 billion in core deposits and the focus on commercial real estate financing and servicing. But there was no significant discussion of a large acquisition/merger last week during GS investor day.

To us, GS should display those famous corporate huevos and go cut a merger of equals deal with U.S. Bancorp. Let the bankers run the bank while the GS traders and investment bankers focus on advisory and asset management. Combined company would be more than big enough to go toe-to-toe with Jamie Dimon and JPMorgan (NYSE:JPM). But do the Goldman bankers have the courage to just let go of the old club house?

Combined USB+GS entity would trade above 2x book with the assurance of $500 billion in core deposits. Yet in the entire GS Investor Day there is no focus on real change which means becoming a big bank. Instead, there is a lot of consultant ya-ya that says that David Solomon and his colleagues intend to continue doing business as usual. The stock closed above book value on Friday, but only after giving up double digits on Thursday and Friday.

Suffice to say that GS will remain in the IRA Bank Dead Pool for now. In related news, another member of the IRA Bank Dead Pool – Citigroup Inc. (NYSE:C) – is reported to be gearing up to re-enter the market for government insured mortgage loans. Bank have generally fled from the market for FHA/VA/USDA loans and GNMA securities because of poor profitability and the outsized risks involved in facing Uncle Sam as a business partner.

Watching Citi diving back into the subprime mortgage market brings back some difficult memories, but also is relevant to a discussion of retail opportunities. In the early 1980s, as the nonbanks known as S&Ls were headed into the wood chipper of mortgage finance, Citi introduced a new global product called “Mortgage Power.” This no doc, no-income verification product was designed for the self-employed. This was the first truly subprime, no-doc mortgage product offered by a large US bank.

By the early 1990s, Citi’s credit losses in mortgages were in double digits, not just in the US but in a number of other markets around the world where this subprime loan product was available. Mortgage Power was shuttered for a few years, but by 2000 Citi was ready to dive back into the subprime mosh pit. The bank acquired Associates First Capital Corporation for $31 billion in September of that year. Citi’s acquisition of the largest American consumer finance company set the stage for the bank’s collapse in 2008.

''This transaction really fits better than most anything that we could think about,'' said Sanford I. Weill, then chairman and chief executive of Citigroup, of the Associates acquisition. ''From the consumer finance point of view, the exciting thing is the global presence.'' Weill eventually would be forced out of Citi by the WorldCom scandal.

The Associates transaction, which was approved by the Federal Reserve Board and other agencies, set the stage for the failure of Citigroup less than a decade later. So when these same federal regulators talk to us about the risks from nonbanks, which have never caused a systemic event, we point to banks like Citi and Wachovia and WaMU and Countrywide as the true examples of reckless, idiotic behavior in the world of residential mortgage lending.

Citi, in particular, was responsible for socializing the no-doc, no-income verification subprime toxic loan into the world of commercial banks. In the 1980s, commercial banks did not make unsecured loans to consumers. But Citi blazed the subprime trail.

Everything that followed, including Lehman Brothers and Bear, Stearns & Co came from that tainted subprime wellspring created by Citi two decades before with “Mortgage Power.” Should Citi actually re-enter subprime mortgage lending in the government-insured market, then we’d take that as a sign that the post-2008 cycle in mortgage credit has truly troughed.

Source: FFIEC

The moral of the story with respect to both Citi and Goldman Sachs is that there is no salvation awaiting either of these underperformers in the world of consumer finance or retail wealth management. The internal customer default rate target of C is a good bit higher than that of GS, probably “B”/”CCC” on average. But Citi at least gets paid double digits for taking risk on consumers, one reason that the underperforming commercial bank makes money overall.

The story coming from GS is more dire. When the house built by Marcus Goldman, Samuel Sachs and Sidney Weinberg on institutional business tells you that it is going retail, meaning down market and down in average customer size, to find profits, there is good reason to be skeptical. Down is the land of Deutsche Bank AG (NYSE:DB) and HSBC Group (NYSE:HSBC), two other members of The IRA Bank Dead pool that we shall discuss in a future comment.

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