Goldman Sachs’ Sale Won’t Allow Return to Freewheeling Ways

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The Goldman Sachs Group is considering a sale of its consumer banking business, but regulations will mean it can’t simply return to being an investment bank, said an expert on financial and securities regulation at Washington University in St. Louis.

“While exiting the consumer banking business may allow Goldman to ‘check out,’ it can never fully leave the regulatory world for bank holding companies and return to its investment banking roots,” said Andrew Tuch, a professor of law.

Goldman Sachs, the investment banking giant, entered into conventional banking after the 2008 financial crisis, as it sought a more reliable stream of revenue.

“The consumer business has not gone as planned, and Goldman has been forced to shift its focus back to investment banking,” Tuch said. “However, even if it exits consumer banking, Goldman will remain subject to Federal Reserve supervision and stringent capital rules for conventional banks.”

This is because it became a bank holding company during the crisis and took government funding, Tuch said. 

“The Dodd-Frank Act’s Hotel California provision, designed to prevent bailed-out investment banks from returning to their freewheeling ways, prevents financial firms like Goldman from reverting to their former structure,” he said.

“The upshot for Goldman is that its glory days as an entrepreneurial, innovative, risk-taking financial institution are behind it,” Tuch said. “Even if it ditches consumer banking and ventures into other activities, it will remain the staid financial institution it opted to become by entering the formal banking system. In many ways, it has already been eclipsed by major private equity firms that remain outside the banking system and now closely resemble the precrisis version of Goldman.”

Tuch, who teaches investment banking and private equity, is an expert in corporate law and governance, securities regulation and financial regulation. He has written on the postcrisis transformation of Wall Street in the Harvard Business Law Review.