Goldman Sachs Doesn’t Want to Be Everyone’s Bank, but It Has to Be Someone’s

Some investors have welcomed Goldman’s consumer retreat, having never quite bought into the idea that the storied Wall Street titan could become a friendly Main Street brand. Investors these days want to own shares in banks that they can stash away in their portfolios and forget about – banks that have mastered the rudimentary work of deposit-taking and lending. 

Goldman, with its background in the boom-and-bust businesses of investment banking and trading, never quite fit the mold. It struggled to build its credit-card business following a splashy deal with

Apple Inc.

Billions of dollars of consumer deposits weren’t put to profitable enough use. A long-awaited mass-market checking account never materialized.

The effort racked up billions of dollars in losses – a rarity for a firm used to winning more deals than it loses.

Yet Goldman can’t go home again. The archetypical Wall Street trading powerhouse and investment bank – famously dubbed a vampire squid by Rolling Stone more than a decade ago – doesn’t exist anymore. This is thanks in part to post-crisis regulations like the Volcker Rule, which barred banks from betting their own money on proprietary, or “prop,” trades.

Goldman emerged from the financial crisis transformed into a run-of-the-mill deposit-taking bank, a status regulators insisted on so it could access emergency funds from the Federal Reserve. It has spent the last 15 years trying to figure out how to be one. 

Now, Mr. Solomon’s task is to convince investors that Goldman can thrive without becoming a bank for all comers like

JPMorgan Chase

& Co. or

Bank of America Corp.

The challenge: produce more of the kinds of steady, recurring revenue that bank investors crave. 

“Our asset and wealth management platform is the key driver for growth,” Mr. Solomon said. 

The to-and-fro of Goldman’s post-financial crisis strategy has a long history. Goldman initially didn’t want to develop into a big retail or commercial bank, but executives started to explore a shift when its trading revenues declined. A banking push meant collecting deposits from account holders, which offer more stable, low-cost funding for the bank that is not subject to market fluctuations. Previously, it had funded itself using holdings of higher-risk assets as collateral. 

After all, cheap deposits and lucrative credit-card loans had fueled JPMorgan and Bank of America to vastly better shareholder returns between 2012 and 2020.

“We’re a bank. It’s not a hypothetical,” said then-CEO

Lloyd Blankfein

in a 2012 interview with The Wall Street Journal. Goldman “backed into a big opportunity.”

The move to a more regulated bank holding company boosted Goldman’s shares, which doubled in 2009 after hitting a low closing price of $52 in November of 2008. Goldman’s stock price now trades at over $350 a share. 

Still, Goldman’s return on equity, or how much profit it earned on its capital, stalled out. It dropped from north of 30% in 2007 to about 11% in 2012, 2013 and 2014.

So it made perfect sense for Goldman to finally try to build up its bank. It added private banking to high-net-worth clients. It pushed out to everyday consumers in 2016 with online high-yield savings accounts, then expanded to lending under the brand Marcus (the first name of a founder of the firm) and credit cards via partnerships with Apple and

General Motors.

It acquired a firm called GreenSky, which specialized in making loans for people to do home-improvement projects. There were plans in the works to offer checking accounts, the basic building block of banking.

But the sum total of those efforts wasn’t translating into substantially higher returns or valuation for Goldman’s stock.

When the pandemic hit, supply-chain snarls and rising prices fueled an uptick in commodities trading. The Federal Reserve’s moves to fight inflation reinvigorated the moribund business of trading around interest rates. The end of free money has made financing trading clients harder, but also quite lucrative for the remaining players.

All of that sparked a renaissance for trading, and Goldman pounced. Though its consumer-banking effort received far more attention in the public eye, Goldman had also for years been refocusing its Wall Street business around the biggest accounts on Wall Street and offered clients direct access to some of the “secret sauce” behind its trading prowess. That means it allowed them to use more of its in-house tools, such as high-powered databases that analyze markets and manage risk. It had greatly expanded its business of financing its clients.

Corporate chieftains, meanwhile, flooded the market with deals and stock offerings. Goldman’s investment-banking revenue surged in 2021, vaulting the bank over 20% return on equity for the first time in more than a decade. 

Even a down year for deal making last year was offset by another big year for the bank’s trading business. The two businesses together produced a combined return on equity over 16% in 2022, versus under 9% in 2019.

The upshot is that Goldman now has a banking-and-markets unit that may never generate the outsized profits the pre-Volcker Rule “prop” trading desks did. But the trade-off is that the unit may be steadier and less risky. 

With that as the backdrop, there is perhaps less urgency for Goldman to look to consumer banking to achieve the kind of predictable returns that shareholders desire. Goldman’s stock has way outperformed the S&P 500, as well as JPMorgan and Bank of America, since the start of 2020.

Still, Goldman falls short by at least one benchmark: its sluggish performance in comparison to

Morgan Stanley.

Morgan Stanley’s yearslong evolution didn’t get the attention Goldman’s did, but its own wealth-management push allowed the company to build a huge business generating steady management fees. Morgan Stanley acquired consumer trading platform E*Trade right before a boom in small-investor trading. Morgan Stanley shares have had a total return over 110% since the start of 2020, versus over 65% for Goldman.

To close that gap, Goldman must once again reckon with being a bank. Instead of turning to Main Street or looking just to Wall Street, Goldman is looking somewhere in the middle – the stewards of America’s retirement money, pensions, insurance funds and university endowments, and to the rich and affluent. Its biggest plan for growth is now with its asset-and wealth-management business.

It is selling its higher-risk, higher-reward principal investments in so-called alternative assets, such as stakes in private companies. This will free up more of its capital to redeploy to potentially less lucrative but far steadier things like loans. Plus, making those same kinds of alternative investments but with client money is a pathway to steady management fees that investors value very highly. Goldman’s asset-and-wealth unit generated about $8.8 billion in management fees last year. The aim is to get to $10 billion.

If the bank ends up making fewer loans to average consumers, it may market more lending to its wealthier individual clients. Only about 30% of its U.S. private-wealth clients currently borrow from the bank. It could use its deposits to fund more lending and financing to institutional and Wall Street clients, which has historically been more the territory of JPMorgan or Bank of America. Goldman is also building a business doing transaction banking, which involves handling day-to-day corporate bank accounts and payments, for big companies such as

American Airlines Group Inc.

Investors may feel their money has been misspent on misadventures in consumer banking. But if Goldman is now ready to finally firmly answer the question “what is a bank,” then it has been a useful identity crisis.

Write to Telis Demos at Telis.Demos@wsj.com

Some investors have welcomed Goldman’s consumer retreat, having never quite bought into the idea that the storied Wall Street titan could become a friendly Main Street brand. Investors these days want to own shares in banks that they can stash away in their portfolios and forget about – banks that have mastered the rudimentary work of deposit-taking and lending. 

Goldman, with its background in the boom-and-bust businesses of investment banking and trading, never quite fit the mold. It struggled to build its credit-card business following a splashy deal with

Apple Inc.

Billions of dollars of consumer deposits weren’t put to profitable enough use. A long-awaited mass-market checking account never materialized.

The effort racked up billions of dollars in losses – a rarity for a firm used to winning more deals than it loses.

Yet Goldman can’t go home again. The archetypical Wall Street trading powerhouse and investment bank – famously dubbed a vampire squid by Rolling Stone more than a decade ago – doesn’t exist anymore. This is thanks in part to post-crisis regulations like the Volcker Rule, which barred banks from betting their own money on proprietary, or “prop,” trades.

Goldman emerged from the financial crisis transformed into a run-of-the-mill deposit-taking bank, a status regulators insisted on so it could access emergency funds from the Federal Reserve. It has spent the last 15 years trying to figure out how to be one. 

Now, Mr. Solomon’s task is to convince investors that Goldman can thrive without becoming a bank for all comers like

JPMorgan Chase

& Co. or

Bank of America Corp.

The challenge: produce more of the kinds of steady, recurring revenue that bank investors crave. 

“Our asset and wealth management platform is the key driver for growth,” Mr. Solomon said. 

The to-and-fro of Goldman’s post-financial crisis strategy has a long history. Goldman initially didn’t want to develop into a big retail or commercial bank, but executives started to explore a shift when its trading revenues declined. A banking push meant collecting deposits from account holders, which offer more stable, low-cost funding for the bank that is not subject to market fluctuations. Previously, it had funded itself using holdings of higher-risk assets as collateral. 

After all, cheap deposits and lucrative credit-card loans had fueled JPMorgan and Bank of America to vastly better shareholder returns between 2012 and 2020.

“We’re a bank. It’s not a hypothetical,” said then-CEO

Lloyd Blankfein

in a 2012 interview with The Wall Street Journal. Goldman “backed into a big opportunity.”

The move to a more regulated bank holding company boosted Goldman’s shares, which doubled in 2009 after hitting a low closing price of $52 in November of 2008. Goldman’s stock price now trades at over $350 a share. 

Still, Goldman’s return on equity, or how much profit it earned on its capital, stalled out. It dropped from north of 30% in 2007 to about 11% in 2012, 2013 and 2014.

So it made perfect sense for Goldman to finally try to build up its bank. It added private banking to high-net-worth clients. It pushed out to everyday consumers in 2016 with online high-yield savings accounts, then expanded to lending under the brand Marcus (the first name of a founder of the firm) and credit cards via partnerships with Apple and

General Motors.

It acquired a firm called GreenSky, which specialized in making loans for people to do home-improvement projects. There were plans in the works to offer checking accounts, the basic building block of banking.

But the sum total of those efforts wasn’t translating into substantially higher returns or valuation for Goldman’s stock.

When the pandemic hit, supply-chain snarls and rising prices fueled an uptick in commodities trading. The Federal Reserve’s moves to fight inflation reinvigorated the moribund business of trading around interest rates. The end of free money has made financing trading clients harder, but also quite lucrative for the remaining players.

All of that sparked a renaissance for trading, and Goldman pounced. Though its consumer-banking effort received far more attention in the public eye, Goldman had also for years been refocusing its Wall Street business around the biggest accounts on Wall Street and offered clients direct access to some of the “secret sauce” behind its trading prowess. That means it allowed them to use more of its in-house tools, such as high-powered databases that analyze markets and manage risk. It had greatly expanded its business of financing its clients.

Corporate chieftains, meanwhile, flooded the market with deals and stock offerings. Goldman’s investment-banking revenue surged in 2021, vaulting the bank over 20% return on equity for the first time in more than a decade. 

Even a down year for deal making last year was offset by another big year for the bank’s trading business. The two businesses together produced a combined return on equity over 16% in 2022, versus under 9% in 2019.

The upshot is that Goldman now has a banking-and-markets unit that may never generate the outsized profits the pre-Volcker Rule “prop” trading desks did. But the trade-off is that the unit may be steadier and less risky. 

With that as the backdrop, there is perhaps less urgency for Goldman to look to consumer banking to achieve the kind of predictable returns that shareholders desire. Goldman’s stock has way outperformed the S&P 500, as well as JPMorgan and Bank of America, since the start of 2020.

Still, Goldman falls short by at least one benchmark: its sluggish performance in comparison to

Morgan Stanley.

Morgan Stanley’s yearslong evolution didn’t get the attention Goldman’s did, but its own wealth-management push allowed the company to build a huge business generating steady management fees. Morgan Stanley acquired consumer trading platform E*Trade right before a boom in small-investor trading. Morgan Stanley shares have had a total return over 110% since the start of 2020, versus over 65% for Goldman.

To close that gap, Goldman must once again reckon with being a bank. Instead of turning to Main Street or looking just to Wall Street, Goldman is looking somewhere in the middle – the stewards of America’s retirement money, pensions, insurance funds and university endowments, and to the rich and affluent. Its biggest plan for growth is now with its asset-and wealth-management business.

It is selling its higher-risk, higher-reward principal investments in so-called alternative assets, such as stakes in private companies. This will free up more of its capital to redeploy to potentially less lucrative but far steadier things like loans. Plus, making those same kinds of alternative investments but with client money is a pathway to steady management fees that investors value very highly. Goldman’s asset-and-wealth unit generated about $8.8 billion in management fees last year. The aim is to get to $10 billion.

If the bank ends up making fewer loans to average consumers, it may market more lending to its wealthier individual clients. Only about 30% of its U.S. private-wealth clients currently borrow from the bank. It could use its deposits to fund more lending and financing to institutional and Wall Street clients, which has historically been more the territory of JPMorgan or Bank of America. Goldman is also building a business doing transaction banking, which involves handling day-to-day corporate bank accounts and payments, for big companies such as

American Airlines Group Inc.

Investors may feel their money has been misspent on misadventures in consumer banking. But if Goldman is now ready to finally firmly answer the question “what is a bank,” then it has been a useful identity crisis.

Write to Telis Demos at Telis.Demos@wsj.com