Goldman's mixed message; Fannie and Freddie have a tall order

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On track

Goldman Sachs “remains on track to achieve its medium- and long-term growth targets despite the economic shocks caused by the novel coronavirus,” president and COO John Waldron. However, Reuters reported, “the economic shutdown has caused some negative impacts, and the bank will be slowing down hiring plans for its private wealth management division and delaying the launch of a digital wealth management product to next year, Waldron said.”

Given bank projections of a 4% drop in global GDP this year and high U.S. unemployment, “the bank will stick to limiting growth in its consumer loan portfolio, which includes credit card balances and unsecured personal loans, he said. However, the crisis has created unexpected growth in some of Goldman’s newer businesses. Deposits in Goldman’s Marcus savings accounts rose to $80 billion as of late May, up from $72 billion on March 31. The bank also now has over 175 large and medium-sized corporate clients using its cash management platform, Waldron said.”

“Waldron warned that the second quarter could see higher provisions than the $937 million in the first quarter” in its consumer loan business, the Financial Times said. “Waldron said the Covid crisis also means Goldman is likely to accelerate its plan to increase the percentage of people working in lower cost cities such as Bengaluru, Salt Lake City, Dallas and Warsaw. At its January investor day, Goldman said it was aiming to have 40% of its staff working from these locations over time, up from a starting point of 33%.”

“Goldman’s fledgling cash management business now has $20 billion of deposits, more than double the $9 billion it had at the end of March.”

Goldman has responded to the economic fallout of the pandemic by boosting its loan-loss reserves and tightening its underwriting, American Banker’s Kevin Wack reports.

Wall Street Journal

Tall order

The new guidelines for Fannie Mae and Freddie Mac to raise $240 billion in capital between them before they return to the private sector are “sensible, but raising that sheer volume of capital in the markets will be a tall order, especially if Fannie and Freddie aren’t generating as much capital through earnings in a recessionary environment,” the Journal says. “What’s more, higher capital levels come with costs in the form of lower potential returns for investors. There is also the coronavirus pandemic to consider.”

“Is there a scenario in which Fannie and Freddie are attractive to private capital, the taxpayer is protected and the mortgage market doesn’t face higher costs during a turbulent period? Right now, ticking all those boxes seems as tricky as ever.”

Cutting the losses

Norinchukin, a Japanese bank that serves the country’s farmers and fishermen, “suffered a ¥400 billion ($3.7 billion) hit” over investments in U.S. debt used to fund private-equity buyouts “and said it would stop investing in that market.” The bank is the biggest buyer of the debt, with about 10% of the $700 billion market. By contrast, “other big buyers include Wells Fargo and JPMorgan Chase, which each owned about $30 billion worth of collateralized loan obligations at the end of the first quarter.”

“Losses on these investments could hamper the banks at a time when bad loans are rising. They could also sour investors on CLOs, which bought roughly 60% of the debt that private-equity companies used for deals in recent years.” Norinchukin “said the unrealized losses were offset by gains elsewhere in its portfolio.”

Financial Times

Silver lining

“The early phase of the coronavirus crisis was the stuff of nightmares for banks’ technology teams, as they grappled with moving hundreds of thousands of jobs from controlled office settings to remote locations in employees’ homes,” the FT reports. Since then, however, technology has proved to be a “silver lining.”

“The obvious — and well-documented — win is the shift to online banking as customers were locked out of closed branches or too fearful to venture out to those that were still open. A quieter but equally significant transformation is taking place behind the scenes. Exiled from their comfort zones, people have become entirely dependent on new tools and ways of working.”

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Consumer lending Fannie Mae Freddie Mac Capital requirements CLOs Online banking
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