It’s true. Starting sometime next year, Goldman Sachs Group Inc. (NYSE: GS) – the poster child Wall Street investment bank of the 1% of the 1% of the superrich – is going to lend money to the remaining 99% of consumer borrowers.
Don’t bother getting all suited up with hat in hand for a visit to a local branch of Goldman Sachs Bank USA (with its $73 billion in deposits) – there won’t be one.
And don’t even think about walking into the bank’s office at 200 West Street in New York City – you won’t get passed security.
However, with Goldman’s new lending strategy, that walk-in access won’t be required.
And as we’ve been predicting for some time, P2P lending is creating a big moneymaking opportunity for you…
We Predicted This
I told you about P2P here back in April and explained how the original peer-to-peer model was being papered over by institutional money and banks getting into the game. I also showed you several great ways to profit.
Just to remind you, in the peer-to-peer arena little folks make loans to other little folks through an intermediary site like LendingClub Corp. (NYSE: LC).
Borrowers seeking money to consolidate credit card debt, pay for a home renovation or pay for school can be funded by creditors like you and me who have some cash to lend and want to collect a higher interest rate than we can get anywhere else.
Of course, as lenders we’d face “repayment risk.”
And that’s where institutions stepped in – in a big, big way big way
All Knowing… and All Powerful
If you or I fund a personal loan and we get stiffed, we’re going to feel the sting. One way to not feel it so much is to have a lot of money to lend, to make lots of loans and to be diversified across a wide spectrum of borrowers. That way, the high interest rates you earn as a lender – across a large loan book – will tend to offset a small-but-expected number of defaults… generating a still high rate of return on your investment.
Goldman Sachs knows that. More importantly, Goldman knows how to assess risk – and is even creating newfangled models that are designed to calculate all the risks of this new lending market. It also has access to enough money to make billions of dollars in new consumer loans. And it has access to the technology needed to create lending platforms in cyberspace.
Add all this together, and it’s clear Goldman Sachs believes it has the muscle to become a serious player in the consumer lending business.
Make no mistake: This isn’t a kinder, gentler Goldman Sachs bending over backward to help little borrowers.
Truth be told, if you want a truly accurate picture, consider what Matt Taibbi of Rolling Stone famously wrote about Goldman back in 2009: “The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”
And it’s clear that right here… Goldman Sachs smells money.
Lots of money.
The multitentacled bank recently hired Harit Talwar, the former chief marketing officer of Discover Financial Services (NYSE: DFS), and bestowed upon him the coveted Goldman Sachs’ “partner” status. Talwar’s mission: Build the investment bank’s online lending business.
While the unit is expected to hire as many as 100 people and be up and running next year, there’s no indication that Goldman will attach its storied-and-disparaged corporate name to the venture.
Getting Your Share
Goldman Sachs has never been a “retail” bank. And achieving meaningful success in a hard-scrabble business that makes personal loans at relatively high interest rates to consumers who are often consolidating numerous credit card bills will be a challenge. The fact that these customers – and the organizations that “protect” them – aren’t afraid to poke their lenders in the eye will make this initiative an even greater challenge.
But thanks to Goldman’s research, the company’s leaders smell money. Of the $843 billion in outstanding consumer loans, Goldman Sachs says about $209 billion worth of personal loans – creating $4.6 billion in profits – is there for the taking by new online lenders.
And Goldman wants its piece.
Goldman Sachs Bank USA will more than likely make loans directly to borrowers through the venture’s online platform. Eventually, the investment-banking firm plans to fund billions’ worth of loans by selling certificates of deposit (CDs) to investors that are backed by Goldman’s balance sheet and overall creditworthiness. Low-interest rate CDs are a cheap means of financing loan growth and will have little impact on the Goldman Sachs’ reserve requirements.
In short order, for fat fees, Goldman will securitize and structure its loans and sell the various “tranches” to institutional investors.
The magic elixir Goldman expects to mix into its new business is its technology and risk-management prowess. If Goldman can create risk measures – in other words, its own proprietary ratings metrics – to accurately assess risk profiles of the borrowers it lends to, it can manage every aspect of financing, lending and collections perhaps better than its competitors and own a big chunk of the online lending business.
Why else venture down the path of the masses of unwashed borrowers?
Back in April when I wrote about P2P lending and how it’s a better deal for borrowers on those sites than individual lenders, I recommended a couple of high-yielding alternative investments for would-be “mom and pop” lenders.
Both of these profit plays are “business-development corporations,” or BDCs, which I explained in my report to you. One was Apollo Investment Corp. (Nasdaq: AINV), with a 10.2% “pass-through yield.”
And the other was Goldman Sachs BDC Inc. (NYSE: GSBD), with an 8% yield.
Why do I like the Goldman Sachs BDC? Because Goldman knows how to make money.
I have no doubt – whatsoever – that if Goldman brands its online-lending venture properly, and markets it extensively, it will add to Goldman’s revenue, net profits and probably stock price.
And what will a successful Goldman venture do to existing online lending platforms like LendingClub?
Stay tuned: I’m closely watching all the players in the space – and am analyzing their businesses and their stocks – and will let you know which ones are worth your investment dollars and which ones you’re better off borrowing from.
No, we’re not talking about a “kinder, gentler” Goldman Sachs.
But we are talking about the investment bank so good at what it does that it all but prints profits.
And with this foray into online lending, it’s going to print some profits for you.
P.S. I recently sat down with Money Morning Executive Editor Bill Patalon to record a battle plan for the coming big crash in the global bond market. Bill and I discuss the worrisome lack of liquidity in the markets and how that threatens bonds and stocks. Then we detail a profit-making strategy you can use to play this crisis. You can listen to our conversation now. Let me know what you think of it by posting a comment below.
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