Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Goldman Sachs Group Inc. just gave everyone a glimpse of its plans to tackle the low-volatility backdrop that's crimping its bond business: It wants to lend more.

The New York bank's top executives gave a presentation this week in which they sought to shift the narrative away from outlining how they plan to revive stagnant fixed-income trading revenues and toward lending. They said the bank could generate $2 billion in additional revenue over the next three years by extending more loans. In particular, they emphasized the Marcus online loan system, which aims to target consumers who might otherwise lean on credit cards for financing. They also indicated they want to invest more in middle-market, real estate, alternative energy and structured debt, all areas that are hot right now and are receiving floods of cash from all directions.

This is risky, especially right now, when U.S. consumer and corporate debt levels are at all-time highs, a fact that Goldman acknowledged.

Leveraging Up
U.S. consumers have been packing on debt in the past few years in light of low rates
Source: Federal Reserve

Delinquencies and defaults are rising. This has been discussed widely about the auto-lending sector, but it is also true for credit card debt.

Getting Riskier
Auto loan charge-offs have risen after many firms lowered their lending standards
Source: FDIC

Some big banks have cut back, only to see other lenders plow in to grab their market share.

This is a risky maneuver at a risky time. Money has been cheap for years, allowing more creditworthy investors ample time to borrow what they need and improve their financial situations. Central banks globally have inflated global asset prices by buying trillions of dollars of bonds, but now they are starting to withdraw that unprecedented stimulus. Investors are still flooding risky assets with cash, but some of the most respected names in the business are becoming more wary of lofty valuations.

The credit cycle is certainly not young. Some would argue that it's closer to the end than the middle and that an economic downturn is in the cards in the not-so-distant future.

Goldman's move makes sense when trading revenues are disappointing and volatility seems so low, leading to lower expectations for third-quarter performance. JPMorgan Chase & Co. this week forecast a 20 percent drop, and Citigroup Inc. estimates trading is on pace to fall 15 percent. These declines shouldn't be unexpected. Volumes in general have been lackluster, and bond yields have inched lower as investors lack any real incentive to make a big move one way or another.

Take It to the Bank
Big U.S. banks own a near-record amount of consumer loans outstanding
Source: Federal Reserve

The problem is that Goldman isn't alone. In fact, it's joining a stampede into all types of alternative lending. Plenty of others are having the same conversation: "We've been careful. We're still trying to be cautious. But we need to make money, as much or more than we used to, and to do that, we need to deploy more of our own cash." No one wants to be stuck on the lending sidelines, and the more firms try to boost their returns, the lower down the creditworthy spectrum they will have to descend.

As more firms make loans they had previously stayed away from, more risk will build in the system, exacerbating the next downturn. That can make firms substantially more susceptible to losses on the other side of the credit rainbow.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net