It would be easy for Goldman Sachs to ask for clarification of the Volcker rules but, being a bank of great risk-taking, it is more in their makeup to do something first and find out what the rules are later. Forbes has a case in point:
Is Goldman Sachs Skirting The Volcker Rule?
by Halah Touryalai - Forbes
Anyone who thinks it’s business as usual on Wall Street in the wake of regulatory overhaul just got some more evidence of that.
One of the big rules coming out of the financial crisis was dubbed the Volcker Rule. The rule, named former United States Federal Reserve Chairman Paul Volcker, prohibits banks from making certain kinds of bets with their own capital, as opposed to making investments on behalf of customers.
The rule was part of the Dodd-Frank Act that Congress passed last year but has had a bumpy ride in implementation so far. Since then, there’s also been a some varied interpretation of the Volcker rule since actual implementation by government has been slow.
The most recent example of that comes out of none other than Goldman Sachs-arguably the king of making profits by trading its own capital. A notable Bank of America analyst said today that that Goldman continues to make principal investments with its own money because executives at the firm don’t believe the practice falls under the Volcker rule.
In other words, Goldman is still using its own money to invest as a principal in longer-maturing assets and securities.
Analyst Guy Moszkowski met with Goldman execs in Hong Kong last week who told him they don’t think the Volcker rule, which bans proprietary trading and limits holdings in hedge funds and private-equity funds, applies to principal investments, according to Bloomberg report.
Goldman Sachs wouldn’t comment on Moszkowski’s note or its interpretation of the Volcker rule when I called the firm this morning.
So is Goldman just being Goldman by getting around regulators’ attempts to manage risk? Maybe.
Regardless though, the government needs to make clear whether or not principal transactions fall in the same category as other prop trading activities. Right now, Goldman doesn’t think they do saying such deals are more of a lending business.
The FT blatantly stated last fall that Goldman, JPMorgan Chase and Morgan Stanley all intend to take advantage of the Volcker rule by continuing to make these so-called “principal investments.” Their argument: principal investments are regarded as longer-term commitments and carry higher capital charges, the FT writes.
…principal transactions were both an important driver of banks’ profits in the run-up to the financial crisis and a big source of losses.
Lehman Brothers’ participation in the $23.6bn leveraged takeover of Archstone, a property group, in mid-2007 contributed to the investment bank’s demise a year later…
Simon Johnson, professor at Massachusetts Institute of Technology, said it would be “pretty crazy” if banks were allowed to invest as a principal in longer-maturing assets and securities. “That’s exactly how banks blew themselves up,” he said.
But Goldman seems to be doing just that. Moszkowski notes that Goldman has a meaningful such deal coming up in China. The bank will buy a 12.02% stake in Taiking Life Insurance from AXA’s Life Ltd. but the value of the stake is not being disclosed. A Goldman exec in Asia notes that such investments have been a key earnings driver for the firm’s Asia business.
Read the full article here