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Goldman Sachs Prepares to “Better Weather Future Disasters”

by Wolf Richter, Wolf Street:

Regular prudent savers & government guarantees to the fore.

Wouldn’t it be great if a big hedge fund could borrow for five years at a fixed rate of 2.05%, just barely above the cost that the US government pays for five-year debt (1.81%)? It’s especially great considering that inflation, as measured by the Consumer Price Index, is 2.4%. In real terms, the rate on this five-year loan would be negative.

Or borrow at 1% daily rate? This would be way below the rate of inflation. And on the rare occasion that creditors gang up on you and try to get their money back all at once, the Fed steps in as lender of last resort. You can rely on that. So no biggie.

You could lend this money out at 5% or 7% or, if you’re into credit cards, at 21%, for example, and keep the difference. Or better, you could bet with this money on the riskiest trades, some of them long-term illiquid deals that might take a decade or longer to unwind. Or you could play with highly leveraged derivatives.

If you could just gather up hundreds of billions of dollars in this manner, or perhaps even a trillion, you could make some serious bucks.

If your bets blow up and the borrowed money disappears, your creditors have a government guarantee. They’re not worried about the risks you’re taking. And they’re ecstatic to lend you the money below the rate of inflation because the yield they’re getting is just a tiny bit higher than what they’re getting in their savings accounts and CDs.

That’s exactly what Goldman Sachs is now seriously pushing into – not dabbling, as it has been – as a major funding source.

“It carries … great strategic potential,” Chief Strategy Officer Stephen Scherr told Reuters today. “The ambition we have is for the retail deposit platform to grow so that it becomes a real, sizable channel.”

This “retail deposit platform” is its online bank for regular savers.

Goldman isn’t the first to figure this out. All banks in the US benefit from this cheap moolah, assuming they know what to do with it, like Goldman is hoping to play this game. Among the biggest: JP Morgan Chase – with $1.4 trillion in deposits – Citibank, Bank of America, and Wells Fargo.

Goldman isn’t in their club. But Goldman wasn’t actually a commercial bank until the Financial Crisis. In order to get bailed out by the Fed, it had to become a bank holding company overnight. Until then, it was a hedge fund and an investment bank.

Read More @ WolfStreet.com

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