For Goldman’s New Strategy Officer, Putting the Bank Back in Banker

When Stephen M. Scherr started at Goldman Sachs more than 20 years ago, the firm operated out of the public eye. Run by a consortium of partners, it did not have to disclose much about its financial health to the world.

But on Monday, Mr. Scherr took charge of the strategy for a vastly different company: one that must continue to prove its dominance and resilience to investors in the wake of the financial crisis.

That strategy requires the firm – now officially a bank with a banking charter since 2008 – to continue growing businesses like asset management and lending. Those are two of several operations that were not as core to Goldman before the financial crisis.

At the behest of Lloyd C. Blankfein, Goldman’s chief executive, Mr. Scherr spent several months helping to conduct a review of the internal bank, which processes most of the loans the firm makes. As Goldman’s new chief strategy officer, which Goldman announced on Monday, Mr. Scherr will look for ways for the bank to grow across the whole firm, including its wealth management and lending operations.

Goldman, just like the rest of Wall Street, has been forced to look for ways to diversify how it makes money as traditionally lucrative areas of business have dried up.

But analysts say that does not mean Goldman, which prides itself on a reputation of zigging where others zag, will conform to the new big bank mold.

“They’re much smaller than the other guys, but I don’t think they want to get as big as them,” said Paul Gulberg, an analyst with Portales Partners. “I think what they want to do is get more targeted.”

Goldman said that Mr. Scherr was traveling and not available for an interview.

With about $64 billion in deposits, Goldman’s banking arm is smaller than the one operated by its closest competitor, Morgan Stanley, which has about $95 billion in deposits (Morgan Stanley has even more deposits if one factors in the assets they’ll get from their Smith Barney acquisition until next summer).

The move by Goldman to put more emphasis on traditional lending and more significantly bulk up its wealth management business follows the lead of Morgan Stanley, which began going down this road several years ago. At Morgan Stanley, the less-risky business of managing other people’s money now more than 40 percent of the firm’s revenue.

Goldman still relies heavily on its trading operations to generate big profits, even if trading isn’t the cash cow it once was in after new rules in the aftermath of the financial crisis were put in place to curb Wall Street’s risk-taking.

Goldman may be interested in increasing its assets under management, but the division generated just over $5 billion of the firm’s $34 billion in revenue last year. Goldman executives have repeatedly said that they were committed to the trading operations. Its capital markets operation made up 60 percent of the firm’s revenue last year, according to research compiled by Sanford Bernstein.

But Goldman’s return on equity, a measure of its profitability, is just more than 10 percent, a far cry from the 30 percent returns of the precrisis era. Getting that number up means holding on to a business that might be permanently constrained, while growing new areas that won’t be hampered by new government regulation.

“They need to be able to generate somewhat higher returns, and the way to do that is moderately change their business mix, not do a radical shift,” said Brad Hintz, an analyst with Sanford Bernstein. “They can’t do something radical, like pulling out of trading.”

Goldman has already worked toward this goal. The firm has begun acquiring smaller asset managers, like Westpeak Global Advisors and Dwight Asset Management Company. And, like all Wall Street firms, it has cut down how much it pays employees.

As of December, Goldman had about $1 trillion under management, including about $330 billion from wealthy individuals, according to its annual filing with the Securities and Exchange Commission. Beefing up those figures could generate some fees, but Goldman also hopes it can increase its lending to high net worth clients. That, in turn, could help facilitate more lucrative transactions.

The bank has already been working hard to make more loans. In the first quarter, Goldman had more than $24 billion in loans on its books, compared with about $4.6 billion in the first quarter of 2009, according to data from SNL Kagan. At the same time, the firm’s assets have remained relatively flat since 2010, meaning that lending is making up a larger, if still single-digit, percentage of the bank’s business.

But making loans to the firm’s existing client base could help multiple areas of business. If investment bankers, for example, had a good relationship with the chief executive of a major firm with which it did business, Goldman could try to manage the wealth of that particular executive, thus cementing the relationship between the firm and the client further.

“They’d like to use lending on a tactical basis going after investment banking fees,” Mr. Hintz said. “Lending only makes sense to them if it facilitates other high-margin business.”