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VIDEOThe Volckerization of Goldman Sachs
By
Megan Barnett Jan 22, 2010 12:00 pm
What the proposal would mean for the House of Lloyd.
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The proposed “Volcker Rule” announced yesterday would limit banks’ size by regulating their proprietary trading operations as well as their ownership of private equity and hedge funds. Not surprisingly, it didn’t receive a warm welcome on Wall Street.
Now, a day later, everyone is trying to determine exactly what the new rules would mean for the banking sector and whether or not there's a real chance they'll actually become law. The sparse details in the proposal have many banks reportedly plotting their loopholes around it already. Moreover, many questions are being raised about why, exactly, proprietary trading has suddenly become the problem that needs fixing most immediately.
But mostly everyone wants to know what it means for Goldman Sachs (GS).
During its earnings conference call yesterday, Goldman chief financial officer David Viniar told analysts that proprietary trading represents around 10% of the firm’s total revenues, give or take a few percentage points. While the hedge fund and private-equity businesses are very important for Goldman, he said, they invest alongside their clients in those funds.
“Banks will no longer be allowed to own, invest or sponsor hedge funds, private equity funds or proprietary trading operations for their own profit unrelated to serving their customers,” Obama said in his speech yesterday.
“The great majority of what we do we do for and on behalf of our clients because our clients want to do something,” Viniar said in the conference call yesterday.
You can already see where this is going. The line between what a bank does for its customers versus what it does for itself is about as blurry as the line that separates Goldman Sachs from the Washington political machine.
Goldman theoretically has the most to lose by the proprietary trading rule. Of all the major banks, including Bank of America (BAC), JPMorgan Chase (JPM), Citigroup (C), and Morgan Stanley (MS), it generates the highest percentage of revenues from prop desk. The other banks garner 5% or less from trading their own money.Perhaps not surprisingly, given the lack of detail in the proposal, analysts were split on its impact. Meredith Whitney, of Meredith Whitney Advisory Group, believes the rule will pass and that it will hit banks and consumers hard. Banking analyst Richard Bove of Rochdale Securities had the opposite conclusion: “The new proposals being put forth by the President are likely to benefit not harm the company. The adjustment of compensation lower leaves more money for shareholders. This is not a time to sell this stock it is a time to buy it,” he wrote, according to FT Alphaville.
The banking analyst at Citigroup, meanwhile, thinks the sell-off created a buying opportunity, at least for JPMorgan shares. Citi believes the regulations would have only a 2% impact on JPMorgan’s normalized earnings. No word yet on what impact Citi thinks it will have on Citi itself.
Perhaps most importantly for Goldman Sachs was Obama’s emphasis that this rule is specifically targeted for commercial banks. Goldman Sachs and Morgan Stanley have only been regulated as commercial banks since late 2008, when the collapse of Lehman forced them under the same regulatory umbrella as deposit banks like Citi and Wells Fargo (WFC).
Viniar was asked about the possibility of revoking its bank charter and his answer was curt. “I think it is not any option at all. It’s not something we ever think about or talk about.”
Of course, eliminating its proprietary trading desk was also probably not something they talked about until yesterday. Reverting back to its investment bank status may very well be something that Goldman’s greatest minds are thinking quite a lot about today.There are far too many questions and uncertainties around the Volcker Rule to declare the death of Wall Street. But whatever ends up coming out of it, rest assured that Goldman Sachs will emerge from it just fine.
No positions in stocks mentioned.
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