Goldman Sachs suffers an identity crisis

Goldman Sachs making too little money is not the worst of the world's problems. But inside the investment bank's New York headquarters, it feels like an insult.

Goldman is not suffering a financial crisis, as it did in 2008 when it officially converted to being a bank holding company amid panic that the whole of Wall Street could collapse. It faces something deeper: an identity crisis.

It used to be the role model for many rival banks - envied even while resented for its single-minded focus on investment banking and trading. But as Tuesday's disclosure of a 26 per cent fall in its bond trading revenues confirmed, banking has changed. Instead of lenders such as JPMorgan Chase wanting to become as glamorous as Goldman, it needs to be more like them.

This is a telling moment, albeit less dramatic than 2008. Investment banking enjoyed a lucrative two decades, spurred by globalisation and financial liberalisation. Goldman's revenues rose briskly from its initial public offering in 1999 to 2007, and boomed in 2009. It could do no wrong financially, although it turned out to have done wrong to some of its customers.

But guess what? Regulation works. Governments and central bank supervisors set out to make complex trading in bonds and derivatives, the securities business in which Goldman specialised, more expensive and less profitable. The rules now favour deposit taking and lending instead of wizardry.

No one really planned the second aspect of the bank's difficulty. The huge dose of monetary easing since the crisis has damped volatility and made markets more predictable. Hedge funds, themselves under pressure, no longer need to reward Goldman and others for taking on financial risk.

Goldman's bond and commodities trading division - from which emerged a cadre of leaders including Lloyd Blankfein, its chairman and chief executive - tells its own story. It used to occupy two floors of the New York office but has shrunk to one as Wall Street's total bond trading revenues have halved since 2009. More prices are calculated by computers than humans.

When you rely heavily on one engine and that engine sputters, you are in trouble. The bank's financial advisory and capital raising division is performing well and it has an investment management arm. But it lacks a consumer powerhouse like Morgan Stanley's wealth management operation, or the lending and credit card activities that drive banks such as JPMorgan.

The humbling truth for Goldman is that US retail banking has become not only more reliable than investment banking, but more profitable. JPMorgan's balance sheet is three times the size of Goldman's and its retail banking arm made a 19 per cent return on equity in the third quarter, compared with Goldman's 11 per cent.

The best historical comparison for Goldman's predicament is, ironically, the JPMorgan of the 1990s. JPMorgan was a blue-chip corporate bank but found that this business was no longer profitable enough as lending margins fell. It launched an effort to return to investment banking, having been separated from Morgan Stanley in 1935 by the Glass-Steagall Act.

JPMorgan had a good stab at it, compensating for the fact that Goldman and others dominated Wall Street's "bulge bracket" by pioneering credit derivatives (which later turned out badly). But it could not make enough progress alone and settled for being bought by Chase Manhattan in 2000.

"Both [banks] have struggled to keep pace with the rapid growth of the leading investment banks, which are in businesses that have been far more lucrative than the lending business at the core of commercial banking," the New York Times noted in its account of the merger. Seventeen years and one financial crisis later, JPMorgan has reversed this order of profitability.

So Goldman is now trying to do the opposite of the old JPMorgan by adding banking to investment banking. JPMorgan's former dilemma has not gone away - lending to blue-chip companies is not much of a moneymaker. A more tempting target is the high margins that banks make on credit cards.

Hence Marcus, Goldman's online lender (named after its founder Marcus Goldman), which offers loans to prime US consumers as an alternative to credit card debt. Marcus, which will launch next year in the UK, accounts for $12bn of the $28bn in new lending and financing planned by Goldman in the next three years as it diversifies.

But it is no simpler for Goldman to break into Main Street than it was for the old JPMorgan to break back into Wall Street: $12bn on a balance sheet of $930bn is an interesting financial experiment, not a revolution. It would need to inflict on consumer banking with technology what Amazon did to the retail industry to rival fully JPMorgan and Bank of America.

"We're a bank and we're committed to being a bank," says one partner firmly. But selling personal loans and mortgages, which could be Marcus's next target, is not a job designed for masters of the universe. This is Goldman's identity crisis: regulation and economics are rendering it ordinary.

john.gapper@ft.com

Copyright The Financial Times Limited 2017