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Goldman Boosts Private Loans to Wealthy

Tracy Alloway, Financial Times
Thursday, 6 Sep 2012 | 1:10 AM ET

The private bank of Goldman Sachs is quietly beefing up its lending to wealthy individuals with a host of new loan products and credit offerings.

Goldman Sachs
Source: goldmansachs.com
Goldman Sachs

Investment banks such as Goldman and Morgan Stanley have turned to private banking to boost revenues as new rules are expected to clamp down on their old profitmaking activities.

Goldman’s commercial bank unit, which contains the in-house “private bank”, currently holds $13.8 billion worth of loans, including home mortgages, made to companies and individual customers.

New mortgage specialists hired by the private bank will be expected to value “subscription capital call loans”, which will allow investors to borrow money from Goldman to help fund private equity investments. Goldman says they could reach annual volumes of up to $750 million.

“Standby letters of credit”, a relatively new offering from Goldman’s private bank, are expected to reach yearly sales of $100 million to $150 million. Such letters typically act as a guarantee of payment.

Together, the two products could boost the private bank’s lending by almost $1 billion and reinforce Goldman’s relations with wealthy customers.

But the expanding business has not come without growing pains. Goldman’s private bank is said to be working to develop a system for assessing the market value, or “fair value” of its expanding pool of new loans and products.

The private bank, closely tied to Goldman’s private wealth management business, had about $50 billion worth of deposits and $100bn worth of assets in July, when the overall company reported a lacklustre set of second-quarter results.

Goldman has held a commercial bank licence since it became a bank holding company in the depths of the financial crisis, a switch which gave it access to emergency lending from the Federal Reserve at the cost of increased regulatory supervision.

The growing private bank is expected to give Goldman wider access to deposits – a more stable type of funding than the wholesale financing that typically backs investment banks’ operations – and a new source of steadier revenues.

The “private wealth business is a good business for us. We have a bank, we are a bank, a bank holding company with a bank, we’re raising deposits, and we’ll use some of those deposits for private individual loans, some of it for corporate loans”, David Viniar, Goldman’s chief financial officer, said in a July conference call.

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