Coronavirus pain will not be evenly spread across tech sector

The fallout is likely to accelerate a shakeout that was already on the cards

Richard Waters in San Francisco

In this March 15, 2017, file photo, a sign marks a pick up point for the Uber car service at LaGuardia Airport in New York. (AP Photo/Seth Wenig, File)
Cash buffer: with a combined $13bn, Uber and Snap enter the downturn in a relatively strong position © AP

Daniel Dines, chief executive officer of UiPath, began grappling with a shift in the outlook for growth companies well before the health crisis that brought large parts of the global economy to a standstill.

After his robotic process automation company enjoyed a massive growth spurt between 2015 and 2018 — which placed UiPath second on the FT’s inaugural ranking of the fastest-growing companies in the Americas — revenue more than doubled again in 2019.

According to Mr Dines, though, the investment climate changed last year, forcing companies like his to turn away from the dash for growth.

“The market has switched from growth at all costs to sustainable growth. Companies need to adjust quickly to the business environment,” he says. The coronavirus shutdown has given this adjustment a new immediacy.

If sustainability had already become the new goal for many growth companies, it has now been replaced by an even more urgent imperative: survival.

Viewed from the depths of an unprecedented global crisis, the FT list already carries nostalgic memories of happier times. The list was compiled with Statista, a research company, and ranks entrants from across the Americas by compound annual growth rate (CAGR) in revenue between 2015 and 2018.

Most companies on the ranking are private and have no obligation to disclose their revenue.

That inevitably makes it incomplete. But the list still provides a rare glimpse into a group of up-and-comers caught at a stage of hypergrowth — at least, that is, until the pandemic struck.

Not surprisingly, the ranking leans heavily towards technology. Roughly a quarter are pure tech companies, while others have thrived by applying tech to well-established industries like finance and commerce.

Bar chart of Sectors by overall % of ranking showing Technology reigns supreme

Tech’s dominance extends beyond North America to other parts of the region.

In Latin America, the years after the millennium saw a wave of new retail and consumer brands shoot to prominence on the back of rising middle-class prosperity in countries like Brazil and Mexico, says Francisco Alvarez-Demalde, a partner at Riverwood Capital, a US investment firm.

But now the focus has shifted: “Technology by itself has become the biggest growth theme” in the region, he says.

Among the fastest growing, those developing software have been among the quickest to reach significant scale.

They include Vlocity in customer relationship management software, Exabeam in cyber security, as well as ecommerce and data platforms like Mohawk and Segment.

“Digital transformation has become a top priority for every [business],” says Soma Somasegar, a managing director at Madrona Venture Group in Seattle, one of UiPath’s backers.

Pointing to the kind of back-office automation UiPath enables, he adds: “For all the progress we’ve seen, we’re barely scratching the surface.”

As software moves deeper into the business world, it is also acting as a wedge for companies trying to break into big industries that have been relatively immune to technological disruption in the past.

Bar chart of New York stretches ahead of rival hotspots from the continent showing Top 10 cities by number of companies ranked

In terms of 2018 revenue, for instance, international freight forwarding company Flexport, with $441m, is third behind only Snap, which owns social media platform Snapchat, and Niantic, the augmented reality developer behind the Pokémon Go video game.

The business in which Flexport operates is large, complex and highly fragmented, says Trae Stephens, an early investor and board member.

“There’s no single product they’re building — it’s about building efficiencies across a very broad stack of things,” he says.

Complex fields like this could represent some of the next big growth markets — though the specialist skills required make it very different from operating a traditional software business.

“There are definitely opportunities” in a number of industries, says Mr Stephens.

“But there haven’t been that many successes.”

Yet the crunch in international commerce this year is likely to hit companies like Flexport hard. Far from thinking about how to maintain stellar growth records this year, most of the companies on the ranking will be focused instead on making sure they are adequately capitalised, have the liquidity to meet immediate cash needs and can retain the flexibility to catch a business rebound, if and when it comes.

Growth at Snap, the fastest-growing public company in the ranking, is projected to slow to 13 per cent this year, from 45 per cent in 2019, before an expected rebound to 61 per cent in 2021.

Uber is following a similar trajectory with growth falling to 9 per cent in 2020, before an anticipated recovery to 32 per cent next year.

Companies like these, with more than $13bn of cash between them, are well positioned to weather the downturn. For other growth companies in promising new markets, the Covid-19 crisis is likely to accelerate a shakeout that was already on the cards.

In the field of AR, for instance, Niantic, the top-ranked company, is still riding the wave of success that began with the launch of Pokémon Go in 2016. But another AR pioneer, Magic Leap, has already cut half its staff this year as investors recoil from making big new speculative bets. Rony Abovitz, the company’s founder, blamed the economic shutdown for a slump in the “availability of capital and the appetite for longer-term investments”.

The pain will not be evenly distributed. Demand for some digital services has jumped as businesses and consumers adjust to the new realities of a world in lockdown.

UiPath’s revenue in the first quarter actually topped the internal forecast, according to Mr Dines, as companies were forced to automate some activities that could no longer be handled by office workers.

Daniel Dines, CEO UiPath. UiPathForward Conference, London.
Daniel Dines, chief executive at UiPath, which ranks second on the FT list © Rob Matthews

Most growth companies, however, are likely to experience a severe revenue hit. Few will come out completely unscathed from this period of contraction and consolidation — however, those with greater financial stability should emerge in a position of relative strength.

UiPath, which raised $500m a year ago, is already thinking about the hiring and M&A opportunities that will come from being one of the survivors, Mr Dines says.

If the coronavirus crisis is followed by the kind of sluggish global recovery many economists predict, then the level of growth represented by the companies in this ranking is likely to remain at a premium. How many of these businesses survives to enjoy the rebound is another matter.

Fraction of Fed lending facilities have been tapped so far

US central bank engineered market rally before most emergency vehicles were up and running  

Colby Smith and Brooke Fox in New York

Montage of Federal Reserve logo, US dollars and chart
The US stock market has rebounded to within 7 per cent of its level at the start of the year © FT montage

Only a fraction of the multitrillion dollar emergency lending facilities unveiled by the Federal Reserve has been deployed, more than two months after the US central bank’s promises of action helped stoke a powerful rebound in financial markets.

The creation of facilities to buy risky assets ranging from junk bonds to local government debt has been a key plank of the Fed’s effort to stabilise markets and boost the US economy, alongside an unprecedented expansion of its balance sheet through the purchase of trillions of dollars of Treasury bonds.

Of the 11 emergency facilities announced in March and April, which promised to make more than $2.6tn available, only five are fully or partially operational and usage stands at $95bn — less than 4 per cent of the minimum funds available — the central bank’s latest figures show.

The limited uptake of some programmes and gradual rollout of others underlines how the US central bank has been able to calm investors just by promising future action, but also raises questions about the sustainability of the recent rallies in debt and equity markets.

The US stock market has rebounded to within 6 per cent of its level at the start of the year, and American companies have been able to issue record amounts of debt. In large measure that is because investors have credited the central bank with eliminating the threat of a financial crisis, putting a floor under asset prices and working to stimulate the US economy as it reopens.

“The innovation, the creativity and the size of it was so large and so fast that their credibility is higher than it’s ever been,” said Rick Rieder, chief investment officer of global fixed income at BlackRock.

Most recent update to alphabetti spaghetti chart.

“Essentially the Fed is showing that when it comes to verbal intervention, they carry the biggest stick in town,” said Sonal Desai, chief investment officer of Franklin Templeton’s fixed income group. “The Fed is speaking loudly and financial markets have heard.”

The 11 facilities, and an alphabet soup of acronyms, were unveiled by the Fed in response to stresses in the financial system and the locked-down US economy that sent borrowing costs for companies and municipal governments soaring. They operate under powers that allow the central bank to make asset purchases in “unusual and exigent circumstances”.

In most cases, because the Fed is not allowed to risk credit losses, the US Treasury is fronting taxpayer money — often a significant proportion of the facility, given that coronavirus has upended business for even previously safe borrowers. The stimulus bill passed by Congress in March included $454bn for the purpose, which could be leveraged by the Fed up to 10 times that amount.

Fed's balance sheet smashes records

The facilities are on top of the resumption of quantitative easing, the Fed’s purchases of Treasury debt and agency mortgage-backed securities, which have also been critical for investor confidence and have already caused the central bank’s balance sheet to balloon to $7tn from roughly $4tn at the start of the year.

According to a consensus of analyst forecasts compiled by the Financial Times, it is expected to top $9tn by the end of 2020, an unprecedented 45 per cent of annual US gross domestic product. Oxford Economics estimates the eventual uptake of the lending facilities could total $2.5tn.

The fact that usage of the facilities so far has been low is “perfection”, said Mr Rieder, noting that the Fed has been able to stabilise markets without actually having to wade too deeply into risky asset classes. “You couldn’t have designed it any better.”

The first serving of alphabet soup came in early March when the Fed revived several financial crisis-era facilities to shore up short-term debt markets, after investors shunned the commercial paper issued by large corporate borrowers and the money market funds that buy such debt. Heavy withdrawals from those funds also put pressure on municipal debt markets, where state and local governments fighting the pandemic borrow money.

A second serving designed to backstop corporate bond markets followed soon after, although it took until May 12 for the Fed’s Secondary Market Corporate Credit Facility, or SMCCF, to actually make its first purchases of exchange traded funds that invest in investment-grade and junk bonds.

Operations to buy debt directly from municipal governments (the Municipal Liquidity Facility, or MLF) and to support small and medium-sized companies (the Main Street Lending programme, comprising three separate facilities) are still not yet operational.

The Fed has, however, bought $45bn of Payment Protection Program loans extended to US small business owners.

Steven Oh, global head of credit and fixed income at PineBridge, said the working relationship between the Fed and the Treasury was “ideal”. Without the Treasury backstop for its facilities, the Fed would have had to be more conservative in its lending, other market participants have noted.

Treasury secretary Steven Mnuchin said last week the US government was “fully prepared to take losses” on its emergency loans. The Fed has also promised to adjust its terms if markets seize up again as they did in March.

Line chart of S&P 500 Index showing A Fed-fuelled rally
Line chart of ICE BofA investment grade corporate bond spread over Treasuries, bps   showing Corporate bonds rebound on Fed support
Line chart of 10-year municipal debt yields % showing Fed rescue for states and cities buoys muni market

The March spike in bond market borrowing costs reversed after the Fed’s actions.

US investment grade companies have issued more than $200bn of new bonds each month since March, with issuance already crossing $1tn this year.

Meanwhile, the Fed and the fiscal stimulus package together sparked a rally in the stock market that has continued this week as parts of the US economy reopen, enabling some stricken companies to tap equity investors for new funds.

Ms Desai said investors could end up taking undue risks if the Fed began to serve as a “crutch” as opposed to a backstop for markets, and she urged the central bank against going much further in its support for Wall Street.

“Financial markets took a beating and came around too quickly from that beating,” she said.

“The real crisis is in small and medium-sized businesses. The Fed needs to spend all of its time and attention on getting main street off the ground to justify the financial market moves we’ve seen.”

Column chart of Assets, $bn showing Some Fed facilities ebb even before all are running

Can New York avoid a coronavirus exodus?

As it prepares to reopen, the city will have to reinvent itself to keep talented people

Joshua Chaffin in New York

© Reuters

Just over a year ago, before the modern plague descended, Manhattan's Hudson Yards threw a launch party that was Versailles-like in its overabundance of champagne, oysters, top chefs, beautiful people and other trappings of a great city.

But on a recent afternoon, Hudson Yards was a ghost town.

Its 1m-square-foot shopping mall was shuttered and its anchor tenant, Neiman Marcus, would soon declare bankruptcy. The Vessel public art sculpture — likened by one reviewer to a giant doner kebab, and usually teeming with tourists — was empty but for a security guard patrolling its base.

The only foot traffic was a steady stream of soldiers, who had been treating Covid-19 patients at the hastily-erected field hospital at the nearby Javits convention centre. They were lined up, at six-foot intervals, to collect free meals at a Hudson Yards storefront that had been converted into a soup kitchen.

Alongside them were delivery drivers, postal workers, office cleaners and others manning the frontlines in New York City’s struggle against coronavirus.

The tableau is a reminder of how drastically the virus has transformed New York, which has potentially suffered more deaths than any other city in the world, in just a matter of weeks. As New Yorkers inch towards a reopening, probably next month, according to Mayor Bill de Blasio, they are contemplating with trepidation how their city will emerge from the pandemic — and what sort of future it will find on the other side.

More than other large cities, New York exemplifies the urban characteristics that the virus has turned into vulnerabilities — population density, sky-high cost of living, a reliance on retail, culture and tourism and a dependence on crowded public transport.

‘The Vessel’ at the closed Hudson Yards last week
‘The Vessel’ at the closed Hudson Yards last week © Mike Segar/Reuters

The modern history of New York City is one of periodic disasters shadowed by the fear of exodus — to other cities that are cheaper, safer, more convenient. There was the 1970s fiscal crisis and the decay that followed; the 1987 stock market crash; the September 11 2001 terrorist attacks; and the 2008 financial crisis — not to mention various hurricanes, floods and power outages.

Yet in each case the doomsayers were proved wrong. The city bounced back stronger than before, and in some ways, reinvented itself. September 11, for example, gave rise to a more vibrant downtown and set in motion Hudson Yards, a $25bn development that is North America’s largest.

After 2008, the world’s financial capital morphed into a technology hub to rival Silicon Valley and strengthened its magnetic pull on a new generation of talent.

“No one is working in New York because it’s cheaper or easier. Nobody. It’s because the talent is here,” says Mary Ann Tighe, chief executive for the tri-state area at CBRE, the real estate services group. Carl Weisbrod, a veteran of city government who led the revival of Times Square in the late 1980s under Ed Koch and was recently appointed by Mr de Blasio to a new task force to guide the city’s recovery, acknowledges that the next 18 months will be difficult.

But he concludes that “as long as New York holds on to its talent, I have no doubt whatsoever that, as an economic matter, it will recover”.

A man walks past the Neiman Marcus store, which has filed for bankruptcy, at Hudson Yards
A man walks past the Neiman Marcus store, which has filed for bankruptcy, at Hudson Yards © Mike Segar/Reuters

Other civic leaders tend to echo that reflexive faith in New York’s future. Some even talk about a unique opportunity to reimagine the city — to clear away nettlesome business regulation built up over generations, attract new industries, or correct the social inequities exposed by the crisis.

As Mr de Blasio said recently: “If ever there was a moment, a breakpoint moment, in the city’s history, this is it. It’s time to look anew at everything we do and see what works, what doesn’t work.”

No quick fix

Before New York can set about reinventing itself there is uncertainty, even among its most ardent supporters, as to how the city will bridge the immediate catastrophe. Many are plagued by a troubling sense that this time is different.

“This is much more complicated,” says Carol Kellermann, who ran the charitable fund created after the September 11 terror attack and also led the Citizens Budget Commission advisory group. “I think it’s going to have much deeper, longer-lasting impacts.”

September 11 was brutal and devastating but the world rallied around the city and its economy resumed within days. After 2008, New York City ended up benefiting from policies that pumped vast sums of liquidity into the financial system.

With coronavirus, there is no quick fix in sight.

The city’s morgues are overflowing after more than 21,000 fatalities — roughly eight times the city’s toll from the 9/11 attacks — and some are forecasting unemployment will rise to 20 per cent in June. Yet the city is arousing less sympathy from the nation than partisan resentment.

New York feels alone.

Worst of all, the very thing that distinguishes New York City and accounts for its unique alchemy — its density — is what makes it so vulnerable to the pandemic.

“Other than better treatments and a vaccine, I don’t know that there’s any government policy that can make people feel safer,” Ms Kellermann says.

New York City Mayor Bill de Blasio gives away face masks to prevent the spread of coronavirus, in Queens on May 16
New York City Mayor Bill de Blasio gives away face masks to prevent the spread of coronavirus, in Queens on May 16 © Eduardo Munoz/Reuters

Those with the means have left, quarantining in places such as the Hamptons, Palm Beach and Aspen. How many will have gone for good, she wonders, if the city’s cultural life is effectively closed and therefore unable to offset its high taxes and other indignities.

“There’s definitely going to be urban flight,” says Winston Fisher, a third-generation developer, who voiced an ever-present fear among New Yorkers of a certain vintage about a reversion to the bad old days.

“I grew up in the city. I’ve been robbed at gunpoint. I remember what 59th and 6th used to look like, Times Square,” he recalls. “New York City can be bad.

Don’t forget that.”

Decontamination effort

To prevent that, there is an emerging consensus that authorities must create a sense of safety, just as they managed to do after September 11.

Otherwise, it will be impossible to restore business — let alone bring back tourists. It is a public health challenge but also a psychological one.In the absence of a vaccine, the governor of New York state, Andrew Cuomo, has turned to former mayor Michael Bloomberg to spearhead a testing and tracing system.

The hope is that as the city begins to reopen, the testers will be able to quickly find new infections and seal them off before they become outbreaks. As Mr Cuomo readily acknowledges, it is a huge undertaking.

Meanwhile, developers are rushing to refit office buildings that had been designed to accommodate a taste for ever-increasing density.

Elevators are being reprogrammed to respond to smartphone apps so there is no need for passengers to touch a button. Internal doors are being removed for the same purpose.

Andrew Cuomo at a news conference last week . He has turned to former mayor Michael Bloomberg to spearhead a testing and tracing system
Andrew Cuomo at a news conference last week. He has turned to former mayor Michael Bloomberg to spearhead a testing and tracing system © Spencer Platt/Getty

A critical focus in this decontamination is the world’s biggest — and possibly most blighted — underground system. The Metropolitan Transportation Authority has begun a regime that would have been unimaginable just a few months ago: to scrub and disinfect each subway car and station every single day.

“New York City and the MTA are fundamentally built on density.

That density creates intellectual collaboration and culture and business and Wall Street and finance and design,” says Pat Foye, the MTA chairman, explaining the subway’s essential role as the circulatory system for a global metropolis.

Mr Foye predicts that new cleaning technologies “could be real game-changers in terms of public confidence in the system”. But cleanliness will come at a cost: he estimates “hundreds of millions of dollars” in additional expense at a time when ridership and fare revenue are down by more than 90 per cent.

The MTA has received $3.9bn in emergency funding from the federal government and is already pleading for another $3.9bn infusion just to make it through this year.

Reality of cuts

That is but one example of the fiscal challenges now lurking at every turn. Mr de Blasio, whose administration has added 30,000 workers to the city’s payroll since he took office in 2014, has estimated the budget shortfall caused by the virus shutdown at $7.4bn.

Others have put it closer to $10bn.

Whatever the figure, Seth Pinsky, who led economic development during the Bloomberg administration, worries that it may pose the most direct threat to a virtuous circle in which talent and companies have chased each other to the city.

“The key to New York’s success over the last 20-plus years has been the first-class workforce it has been able to attract,” says Mr Pinsky, who recently took over as head of 92nd Street Y, one of the city’s leading cultural institutions.

“What I worry about is that as government starts to react to the fiscal situation we are going to be forced to make cuts to basic services that are going to be so devastating that they will undermine the quality of life in the city.”

An employee cleans a subway car as part of decontamination efforts on May 17
An employee cleans a subway car as part of decontamination efforts on May 17 © Vanessa Carvalho/ZUMA/dpa

Finding ways to preserve restaurants, museums, galleries and the like is not just “having a soft spot for arts and culture”, Mr Pinsky says. Rather, it is essential to maintain the appeal — and viability — of an otherwise expensive and challenging place to live.

When Donald Trump was elected president, some New Yorkers consoled themselves that he was, at least, one of them, and could therefore be counted on to look out for the city’s interests.

But his sustained hostility to the city that voted overwhelmingly against him in 2016 is dimming hopes for federal support. Mr Trump’s 2017 tax cut was largely paid for by punishing New York and other, Democratic-leaning high-tax states.

Even if Mr Trump were inclined to help, Mitch McConnell, the Senate majority leader, has dismissed pleas for coronavirus aid as “blue-state bailouts”.

After September 11, Mr Bloomberg responded to the downturn by raising property taxes, a stream of revenue that accounts for nearly a third of New York City’s $89bn budget. But that trick will not be easily repeated.

Developers may be in no position to shoulder a heavier financial burden at a time when many of their own tenants have stopped paying rent. They are also confronting a larger fear: after a crash course in remote working, some of the city’s biggest employers — including BlackRock and Morgan Stanley — have announced that they will require less office space in the future.

If that conclusion is widespread, then Manhattan property values may be headed for a reckoning.

Even before coronavirus, the wealthy were beginning to flee the city’s rising taxes for places such as Florida and Texas. “People are leaving New York and they’re leaving New York in droves,” says Norman Radow, a one-time New York developer who is now based in Atlanta.

The coronavirus, he adds, “is just the icing on the cake”. Still, Mr Radow’s own experience made him wonder if there might be investment opportunities ahead. He first moved to Manhattan in 1978, the depths of the fiscal crisis, and bought a two-bedroom apartment for $63,000.

“Everyone thought it was the end of New York,” he recalls. “And look what happened.”

Amid the wreckage there are shards of hope. Some are warming to the possibility that a city that became so overheated in this cheap-money era — a bastion of billionaires, ensconced in Hudson Yards — might now undergo a pandemic-induced reset. Cheaper rents may eventually make the city more accessible for a new generation, who will put spaces to use in ways their elders can scarcely imagine.

People walk over the Brooklyn Bridge as the World Trade Center burns September 11. Mr Bloomberg responded to the downturn by raising property taxes
People walk over the Brooklyn Bridge as the World Trade Center burns on September 11. Mr Bloomberg responded to the downturn by raising property taxes © Spencer Platt/Getty

“It always happens after every crisis. It seeds the next phase,” says Daniel Kaplan, senior partner at architecture firm FXCollaborative. WeWork, Mr Kaplan notes, was born from the unused office space left in the wake of the 2008 crisis.

Ms Kellermann agrees: “My daughter, who’s 35, says it’s going to go back to what it was in the ‘70s and ‘80s — grittier, but more risk-takers.” (She acknowledges that her daughter had not actually experienced New York in the 1970s — a time when the annual murder rate breached 2,000 and the subway was off-limits after nightfall.)

Mr Fisher now sees a rare chance to streamline an antiquated city government and improve the flow of credit to small businesses. Like other members of the business community, he would also like the city to prioritise the life sciences industry as a next source of high-paying jobs — just as the Bloomberg administration cultivated the tech sector.

Even with Amazon’s decision last year to cancel plans for a second headquarters in Queens, New York City has still managed to attract billions of dollars in investment from the online retailer, as well as Facebook and Google, that have shined and reshaped the city’s west side, including Hudson Yards. Mr Weisbrod wants to build more affordable housing.

“I think the pendulum has swung way too far against development,” he says.

“Everybody says they want more affordable housing but nobody wants it in their neighbourhood.”

With coronavirus prying open the public’s eyes to the disparities between rich and poor, there may be the chance. At the same time, Mr Weisbrod and other civic leaders worry how the crisis will eventually shape the city’s politics.

Will it be a constructive force that brings reform — or a divisive one that ultimately pits communities against one another?

The race next year to succeed Mr de Blasio as mayor may be one of the most consequential campaigns in the city’s modern history.

Will his successor be another self-described “progressive” or a member of the executive class, in the mould of Mr Bloomberg — or something else entirely?

Whoever prevails should have faith in New York’s resilience but also, as Mr Pinsky warns, not forget its darker days.

“Those were ugly times,” he says of the 1970s, when New York City’s economic base was wrecked and its population shrank by 800,000 residents.

“It took us decades to crawl out of that hole. We should be very careful about not falling back in.”

Goldman Sachs ramps up cash management plans despite coronavirus

US bank expected to pay up to 200 basis points more than rivals on some deposits

Laura Noonan in New York

Goldman chief David Solomon wants to diversify the bank’s revenues beyond its trading and advisory roots
Goldman chief David Solomon wants to diversify the bank’s revenues beyond its trading and advisory roots © Bloomberg

Goldman Sachs is planning to launch its fledgling cash management operations in the UK by September and across Europe by the end of the year, as the bank presses ahead with investment in the division in spite of the coronavirus crisis.

The timetable is detailed in a presentation shown to prospective clients in recent weeks.

Goldman has also offered to pay significantly more than rivals for some deposits, people familiar with the pitch said, mirroring its strategy for winning deposits at its Marcus consumer arm.

Cash management — which includes holding deposits for corporates, receiving cash on their behalf and making payments — is the biggest part of the transaction banking business Goldman is getting into as chief executive David Solomon tries to diversify the bank’s revenues beyond its trading and advisory roots.

While Goldman lacks the huge global footprint of companies such as Citigroup, JPMorgan Chase, Deutsche Bank and HSBC in cash management, the bank believes it can woo clients with a new technology platform that is more customer-friendly than the legacy players’ efforts.

The 10 largest cash management players in the world shared revenues of almost $26bn last year, according to research from industry monitor Coalition. Executives argue that Goldman, which began managing its own cash last year, needs to win only a small share of the market to make the foray worthwhile.

By the end of the first quarter, Goldman’s new division had $9bn in deposits across more than 80 clients, a drop in the ocean relative to Goldman’s $1.09tn balance sheet but a result that “exceeded expectations”, according to Mr Solomon.

Goldman has spent the past few weeks courting the US corporates that it hopes will become the platform’s mainstay. One person familiar with discussions said Goldman had promised to pay as much as 200 basis points more than rivals on some deposits.

A second person said that Goldman’s pricing strategy was to be in the “70th percentile”, implying that it would offer better pricing than 70 per cent of the market, but would not be the most aggressive.

Goldman’s international strategy revolves around “virtual accounts” that allow clients to split their main US bank account into a collection of digital accounts that manage deposits and cash flow across countries and currencies.

JPMorgan Chase, one of the world’s biggest cash management players, offers virtual accounts across 11 countries and 35 currencies.

A spokesman for Goldman said the bank would not comment on the details of its cash management plans until the platform’s official launch next month.

“We believe our intuitive, transparent technology will be our significant differentiator,” he added.

Banks Are Only as Sound as Their Models

The unprecedented nature of today’s economic shutdowns make it hard for lenders to update the complex models at the core of their business

By Rochelle Toplensky

Unprecedented is an overused word of late, but it does precisely capture a key challenge for banks:

How to update the models at the heart of their businesses, given widespread economic uncertainty and a dearth of relevant historical data.

Major U.S. and British banks are preparing for loan losses. / Photo: ben stansall/Agence France-Presse/Getty Images .

In recent first-quarter results, lenders used widely differing approaches and assumptions about the coming months to estimate loan losses. The only consensus: It is still too early to know how this crisis will play out.

That is understandable, given how little clarity there is about the path to recovery, with expectations shifting almost daily. But it also increases the risk that those complicated models get it wrong, with real-world consequences for investors.

Models—used not just to estimate loan losses but also to value little-traded assets and design, price and assess the risk of products—are crucial to a bank’s financial position and health. U.S. and European banks have relatively strong balance sheets and buffers for now, but they are still giant leverage machines, carefully calibrating their risks and capital levels to boost returns.

Depending on how they are calculated, estimated loan losses or asset revaluations could easily eat into those buffers.

Loan-loss estimates in particular are sizable and uncertain. The six largest U.S. lenders set aside over $25 billion for loan losses in recent results, which seems little more than a first guess and will likely rise.

Major British banks estimated their losses at £7.5 billion ($9.2 billion) in the first quarter, but the full year hit could be as much as £18.5 billion, according to S&P Global Market Intelligence.

Banks also routinely revalue their financial instruments, and those that aren’t widely traded—so called Level 3 assets—are priced using internal estimates. The big U.S. and European banks have reduced their Level 3 holdings by 27% in the past five years, according to brokerage Berenberg, but some, particularly in Europe, still have a lot of these opaque assets on their books relative to their capital buffers.

Lenders have an army of boffins with Ph.D.s and advanced modeling skills on hand to help.

They also have decades of market data, including for the 2008 global financial crisis. The big problem is that there is no useful paradigm for the current pandemic-caused crisis, particularly with its global scope and risk of additional waves and lockdowns. It has ushered in extreme movements in markets and levels of government spending that just a few months ago would have seemed absurd. It is very hard to know what will come next.

Models can be stretched with extreme scenarios to check their sensitivity, and results can be adjusted for factors not captured in calculations based on historical data. Novel new information sources, such as traffic or mobile phone data, are being tested. But the updates are inevitably based on a mix of science and art with a sprinkling of guesswork.

In the circumstances, it is little comfort that the models are independently tested by banking regulators and external auditors. Official oversight is subject to the same uncertainties as the modeling process itself.

The current crisis has made the imperfections and risks inherent in bank models a lot worse, and miscalculations could be expensive. The coming quarters could spring a few surprises on bank investors.