Memo From Goldman Traders——Thanks For The Insured Deposits, FDIC

By Tyler Durden

One month ago we last checked in to see how Goldman’s brand new FDIC-insured depositor operation was doing: we were surprised to find just how much of a success it had become. As we reported at the time, by mid-August, Goldman has netted $1.8 billion in new deposits thanks to its overly generous 1.05% interest rate which is among the highest on offer anywhere. Some 33,000 people who’ve opened accounts, although since Goldman does not have any retail branches or ATMs, these new depositors can’t write checks from their accounts or take cash out of ATMs.

The immediately following logical question was why does Goldman need this cash?  We put forth that “maybe Goldman is simply prudent, and realizes that if the Fed is forced to drain some $2.2 trillion in reserves, bank cash balances will collapse to just a few hundred billions, as we have shown in the below chart netting out excess reserves from bank cash balances.”

To be sure, the moment when the Fed begins selling down its balance sheet and withdrawing reserves is still years away, if it ever comes. Which took us back to the original question:

  “why tempt depositors with such abnormally high rates of interest? We ask, because the last time a “healthy” bank was such a substantial outlier to its peers (a JPM High Yield checking account currently yields about 0.01%) it ended up tempting depositors with a [Spiderman towel] before it had to be bailed out.”

Today, we got the answer. According to an exclusive investigation by Reuters, Goldman has been using the proceeds from the new deposits to directly fund speculative activity such as trading and investments, as well as more conventional activity such as creating looans. According to Reuters, Goldman Sachs built up its consumer bank, it established a team to put its deposits to work on Wall Street, a telling development about Goldman’s ambitions for the retail bank.  Led by 40-year-old Goldman partner and credit trading veteran Gerald Ouderkirk, the team’s job is to use consumer deposits and other types of funding for trades, investments and big loans to earn profits, people familiar with the matter told Reuters.

The existence of the team, which has not been previously reported, was set up in mid-2015 and is formally known as the institutional lending group. Lately, it has ramped up activities as Goldman Sachs looks to do more lending broadly.

More curiously Reuters points out some Goldman executives bristle at the idea that Ouderkirk’s team is similar to chief investment offices, or CIOs, at bigger banks such as JPMorgan and Bank of America Corp, since Chief Financial Officer Harvey Schwartz and Treasurer Robin Vince still manage the bank’s day-to-day liquidity, including how much capital Ouderkirk gets to work with.

What Reuters means here is that quietly Goldman has been incubating its own “New York Whale” division. Recall that JPM’s infamous “London Whale”, which blew up spectacularly in 2012 after trying to corner a part of the debt market, did so using the bank’s excess deposits as investible dry powder.


Our latest take on how JPM’s CIO used retail deposits to fund trades in a 2013 article titled “This Is What JPMorgan’s London Whale Office Is Investing Your Deposits In Now.” It is now Goldman’s turn to use low-cost retail deposits as initial margin with which to try to corner various aspects of the bond or stock market.

As Reuters writes, Goldman became a bank holding company at the height of the financial crisis in 2008, as did rival Morgan Stanley. Although Morgan Stanley started moving toward traditional lending activities after agreeing to acquire Smith Barney in 2009, Goldman’s progress has taken longer. However, for years, bank officials denied any intent to transform Goldman Sachs into the sort of bank that dealt with Main Street consumers. They argued Goldman’s bank would only cater to the wealthy individuals and corporations that had long been its client base.

They changed their mind, and as Reuters adds, management’s thinking evolved as regulators have pushed the industry to get back to the basics of banking. For Goldman, deposits also represent a more stable and stickier type of funding than other types of short-term debt it has relied on historically. Not to mention cheaper, now that short-term sources of unsecured funding have jumped following the recent moves higher in Libor.

Last year, Goldman announced it would buy GE Capital Bank’s U.S. online deposits. It plans to roll out an online lending platform for retail customers later this year. According to Reuters, Goldman’s deposits now total $123.7 billion, which however includes both retail and institutional amounts.

Who is the man who was tasked with developing Goldman’s CIO?  “Jerry” Ouderkirk joined Goldman in 1998 and made a name for himself structuring profitable bets against the mortgage market in the run-up to the financial crisis. Known as Jerry, he most recently served as co-head of global structured credit trading. Ouderkirk became head of the institutional lending group last August. He oversees a team of around half a dozen people and reports to Stephen Scherr, who is CEO of Goldman’s U.S. bank and chief strategy officer of the broader company.

Goldman, which generated a net interest margin of 1.25 percent in the second quarter, the second lowest among the top 30 banks by asset size, according to FDIC data, is interested in boosting its all in return from borrowing and lending. The average net interest margin for all U.S. banks is around 3 percent. Morgan Stanley, Goldman’s closest peer, has a margin of 1.78 percent.

As a result, it will take deposits on which it pays 1.05% interest and hope to invest them into products that generated far greater returns.

As Reuters reports for the first time, Ouderkirk “has been coordinating with executives across Goldman’s merchant bank, investment bank, private bank and trading desks to find ways to use Goldman’s balance sheet most profitably.”

For example, Goldman’s real estate group might have a client in need of a multibillion-dollar commercial mortgage to buy a building. After underwriters vet the borrower, Ouderkirk’s group might offer deposits to fund it. Some of that debt would be distributed to outside investors, but Goldman’s bank would retain a slice of it to earn interest income.

To be sure, using deposits to merely fund loans is nothing new or spectacular: it is a bank’s bread and butter. It is what JPM’s CIO was supposed to be doing… until the “tempest in a teapot” incident turned out to be vastly worse and almost led to Jamie Dimon’s ouster several years ago as a result of various Congressional hearings.

Now it is Goldman’s turn to take what is supposed to be a relatively riskless interest and maturity transformation, and in its yield for returns, level up deposit cash, and transform it into some heretofore unseen financial product which will blow up in a never before seen, and truly spectacular fashion.

Finally, for those wondering where the regulators are, the answer is nowhere: Goldman’s institutional lending group is still in its infancy, and it is unclear whether regulators had any say over its development. A spokesman for the U.S. Federal Reserve, Goldman’s prudential regulator, declined to comment.

Source: Step Aside London Whale: Goldman Is Now Using Retail Deposits To Fund Investments