Goldman Sachs (And Other Banks) Sacrifice Pandemic Loans To Small Businesses And Boosts Dividend Payouts
The Senate Banking Committee is questioning whether Goldman Sachs Group Inc. paid dividends at the expense of lending to businesses and households during the pandemic as lawmakers take a broad look at the support big banks offered clients to get through the economic slump. Goldman Sachs (And Other Banks) Sacrifice Pandemic Loans To Small Businesses And Boosts Dividend Payouts
Committee Chairman Sherrod Brown and fellow Democrat Elizabeth Warren sent Goldman Chief Executive Officer David Solomon a letter late last week, asking how its banking unit made use of a temporary weakening of capital requirements last year, a move regulators intended to spur lending. The lawmakers asked him to produce data on the unit’s lending and on Goldman’s distribution of cash to shareholders.
Industry groups “have argued that these reduced capital requirements support lending to small businesses and households,” Brown and Warren wrote, according to a copy of the letter viewed by Bloomberg. “It has also been widely reported, however, that banks are devoting a smaller share of their resources to lending for small businesses and households.”
The inquiry is part of a broader debate over whether U.S. banks are offering enough credit to help the economy rebound. As individuals and companies sought loans to get through Covid-19 lockdowns last year, federal regulators temporarily let big banks reduce the amount of capital needed to support their activities. But, by some measures, bank lending declined to record lows as firms piled up cash and securities effectively guaranteed by the federal government, Federal Reserve data show.
“Throughout the pandemic, Goldman has provided a wide variety of financing to all of its clients — from consumer loans, to traditional corporate loans, and equity and debt financing in the capital markets,” company spokesperson Andrew Williams said. “Across all financing categories, volumes were up, and we are proud to have helped our clients and customers through an unprecedented and challenging year.”
Goldman’s bank subsidiary last year increased total loans and lending commitments by 10% to $236 billion, according to an annual company report. But deposits, a key source of funding to make loans, increased 29%. That gap is found across the broader U.S. banking system, which increased loans by just 3% even as deposits jumped 22%.
Brown and Warren previously criticized federal banking regulators for loosening rules to let big U.S. banks borrow more while simultaneously reducing capital by buying back shares or paying dividends to shareholders.
Among their questions for Solomon, the pair asked if Goldman loosened its underwriting to make more loans to borrowers with dings on their credit reports, and whether the bank provided cheaper credit to its customers. They asked him to respond by March 26.
Banks Are Expected To Pare Back The Cash Stockpiles They Built Up To Cover Pandemic-Era Loan Losses
U.S. banks are sitting on a pile of cash that could turn into billions of dollars of profits.
In the coming months, banks are expected to free up tens of billions of dollars in reserves they set aside to cover soured loans—losses that still haven’t materialized a year into a pandemic that shut down swaths of the U.S. economy.
In 2020, banks rushed to build up their stockpiles to cover losses on the assumption that consumers and businesses would default on their loans after government stimulus ran out. U.S. banks had $236.6 billion in total reserves in December, according to the Federal Deposit Insurance Corp., nearly double their level from before the coronavirus upended the economy and sent unemployment up sharply.
Bank executives aren’t so worried anymore. The economy has outperformed banks’ internal forecasts. Vaccine distribution is ramping up. And a $1.9 trillion stimulus package was signed into law last week.
Consumers and businesses, they now say, likely have dodged the pandemic’s worst-case financial scenario.
“There are a lot of positive reasons to feel good about the path to recovery,” Citigroup Inc. Chief Financial Officer Mark Mason said at the Credit Suisse financial-services conference last month.
Citigroup, he said, likely will reduce its $27.6 billion pile of reserves in the first quarter, potentially by more than the $1.5 billion the bank freed up in the fourth quarter.
Reserves are meant to cover expected losses on loans. They subtract from a bank’s profit when they are put in place and add to it when they are removed.
Since the start of the year, analysts have lowered their loan-loss projections and lifted the combined 2021 profit forecast for JPMorgan Chase & Co., Bank of America Corp. , Citigroup and Wells Fargo & Co., by 10%, or $7 billion, according to FactSet.
Analysts now expect the four banks to earn $77 billion in 2021, up from $61 billion last year.
The improving outlook has lifted bank stocks out of the doldrums. The KBW Nasdaq Bank Index is up 26% for the year to date, while the S&P 500 has risen 5%.
Still, reserve releases will provide only temporary relief. Revenue is expected to decline slightly at the four biggest U.S. banks in 2021, a result of an expected drop in lending and a slowdown in market activity.
“It’s ink on paper,” JPMorgan Chief Executive Jamie Dimon told analysts in January about reserve releases. “We’re cheering that America’s doing better, but we don’t consider that earnings.”
Banks set their loan-loss expectations using broad economic gauges, particularly gross domestic product and unemployment rates. From that starting point, they factor in hundreds of other variables, with some leeway built in for how optimistic or pessimistic executives feel.
Since the start of the pandemic, bank executives have tended toward pessimism when setting aside loan-loss reserves. As a result, their internal models offer a more muted outlook than broader economic forecasts.
The Organization for Economic Cooperation and Development recently said it expects U.S. gross domestic product to grow 6.5% this year, double its December forecast. Economists are projecting unemployment, now down to 6.2%, to keep falling to 5% by December, according to a Wall Street Journal survey.
The improving economic outlook led banks to release some reserves in the fourth quarter. Executives said then they would need more clarity around consumer sentiment and other economic gauges before paring them back further.
As the Credit Suisse conference in late February, executives said the economy’s trajectory is becoming clearer. While they remain cautious, some pointed to a decline in consumer debt and an increase in spending as positive signs for the economy.
“Time will tell if this is an inflection point, but it is reason to be optimistic,” JPMorgan CFO Jennifer Piepszak said.
An accounting-rule change last year has further complicated the task of calculating reserves. Banks now have to record expected future losses as soon as a loan is issued, rather than wait for evidence that losses are likely.
Bank executives are still hesitant to explain what normal, nonpandemic reserves would look like under the new rules, said Credit Suisse analyst Susan Roth Katzke, who interviewed many of them at the conference last month. Without that information, it is difficult to predict how much they will release in the coming quarters.
“I’m more interested in learning the size of the reserves going forward,” she said.
Goldman Wins Class-Action Appeal For Investor Fraud Suit
Goldman Sachs Group Inc. won an appeal of class-action status for a case that accuses the company of misleading shareholders by masking conflicts of interest in mortgage-backed securities it sold.
The federal court of appeals in New York Thursday threw out a lower-court ruling allowing the case to proceed as a class action on behalf of shareholders. The court said it was following a June ruling by the U.S. Supreme Court in the case.
The case is Arkansas Teacher Retirement System v. Goldman Sachs, 18-03667, Second U.S. Circuit Court of Appeals (Manhattan).
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