Breakingviews: Wannabe bank Goldman should take its own advice

A chief executive comes to a Goldman Sachs investment banker with a quandary. He wants to break into a lucrative new business, and effuses about his smart technology. Building this new business from scratch is proving a slog, and much larger rivals are aggressively defending their turf. “No problem,” says the Goldman banker, whipping out a pitchbook of potential acquisition targets. “I’ve got just the deal for you.”

Now imagine the client is Goldman itself. The Wall Street firm run by David Solomon is keen to break into consumer banking, and fourth-quarter earnings show it’s making headway, but slowly. The consumer division that holds retail bank Marcus made less than $1 billion of revenue for the whole of 2019. Growth halved in the fourth quarter compared with the full year. And while a credit card venture with Apple sounds exciting, it’s still small and requires investments.

The M&A shortcut has its appeal. Goldman tends not to buy when it can build, though exceptions have been made in consumer finance, including the purchase of financial app Clarity Money. And it may not want the physical branches that come along with a bank as it likes to be brick and mortar light. But America’s surfeit of bite-sized commercial lenders must be tempting. The number has almost halved in the past 20 years, but still sits at over 4,500 according to the Federal Deposit Insurance Corp.

Moreover, the political climate may not get friendlier than it is now. Under President Donald Trump’s Republican administration, banks like BB&T and SunTrust have been allowed to merge with minimal concessions. That hasn’t pleased Democrats like Maxine Waters, chair of the House Financial Services Committee, who has warned about the dangers of “mega-banks.” The 2020 presidential election could change the climate, taking the creation of financial conglomerates off the menu.

It’s unlikely anything can happen before Goldman has tidied up the loose ends around its involvement in Malaysia’s 1MDB corruption saga. The Federal Reserve would need to approve any big deal, and that would be tough while the whiff of scandal hangs around Solomon’s firm. The fact Goldman set aside a $1.2 billion litigation charge on Wednesday suggests it is getting closer. Solomon may soon be able to ask himself: What would Goldman do?

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