Seeking to Adapt

Goldman Sachs & Morgan Stanley Take Alternative Routes to Retail Banking
Posted by Leo M. Tilman, December 27th, 2008, 5:14pm

The recent conversion of Goldman Sachs and Morgan Stanley into bank holding companies was more than just a necessary means of getting access to Federal funding. It was an acknowledgement that the business model of independent investment banks was no longer viable. As investment banking fees and trading commissions contributed increasingly less to the bottom line of investment banks, their business models centered around principal investments and other forms of risk-taking became increasingly vulnerable, especially in a setting of a highly leveraged public company.

GS’ and MS’ conversion into bank holding companies was an example of a “business model transformation” advocated by Financial Darwinism. The book also argues that once business model transformations that reflect the executives’ strategic vision and external factors are enacted, “business model recalibrations” – systematic enhancements of individual components of economic performance – must be continuously performed. This is exactly what Goldman Sachs and Morgan Stanley are in the process of doing – in the realm of retail commercial banking that has valuable funding advantages. Both firms are racing to diversify their liabilities and stabilize their business models as bank holding companies. As a critical part of this process, they are aggressively pursuing the growth of retail deposits amidst the continuing credit crisis.

Given both companies’ sophistication, they should be able to avoid some of the historical mistakes of expansions into the retail marketplace, most notably the so-called “stocks and socks” debacle Dean Witter found itself in after being acquired by Sears Roebuck and Company. In the spirit of Financial Darwinism. Goldman Sachs and Morgan Stanley are taking very different routes to the same goal, utilizing their unique competitive advantages and illustrating the different strategic visions of their executives. 

Goldman Sachs is reportedly launching an internet banking operation in order to seek deposits.  The company already has about 20 billion dollars in deposits, which are held by its bank subsidiaries. Its new online yet-to-be-named bank is likely to start offering a wide array of deposit products, including checking, savings, money market accounts as well as CDs.

Meanwhile, Morgan Stanley is embarking on an entirely different direction.  It is seeking potential acquisitions of regional banks.  The company already holds over 36 billion in bank deposits.  Acquisitions of retail banks should help the firm to leverage its vast network of financial advisors to cross-sell banking and wealth management services.

The appeal of retail deposits is obvious. In risk-based terms, it’s an extremely valuable component of economic performance that deserves a very high P/E ratio. But, not surprisingly, the entry of Goldman Sachs and Morgan Stanley will only intensify the already fierce competition for retail deposits, as they join the Bank of America, Citigroup, Wells Fargo, ING Direct, JPMorgan Chase, and many others in the crowded “red ocean” of companies all competing for advantage in a finite market.  This is likely to result in deposits becoming even more sensitive to changes in interest rates which, in turn, will reduce their economic


Banking executives have no choice but to think about unlocking value of commoditized products in “blue ocean” terms. This certainly applies to retail deposits, and the current directions of Goldman Sachs and Morgan Stanley – and their apparently diverging evolutionary trajectories – neatly illustrate the fundamental remedies of Financial Darwinism.

John Patti has contributed to this article.

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Financial Darwinism explores the origins, drivers, and implications of the ongoing tectonic financial shift. It then equips executives and investors with actionable approaches to creating lasting economic value amidst complexity and uncertainty.

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