Goldman Sachs (NYSE:GS) has figured out a novel approach to getting around the Volcker Rule’s restrictions on trading: it’s remaking its risk-taking traders into asset managers, and the rest of Wall Street may soon follow, FOX Business Network has learned.
The big Wall Street firm has moved about half of its “proprietary” stock-trading operations — which had made market bets using the firm’s own capital — into its asset management division, where these traders can talk to Goldman clients and then place their market bets.
The move is designed to exploit a loophole in the Volker Rule, part of the recently signed financial-reform legislation named after presidential economic adviser and former Federal Reserve chief Paul Volcker. The Volcker Rule is supposed to scale back on Wall Street risk taking by ending what’s known as proprietary trading, where firms use their own ideas and capital to make market bets.
But by having the traders work in asset management, where they will take market positions while dealing with clients, Goldman believes it can meet the rule’s mandates, avoid large-scale layoffs and preserve some of the same risk taking that has earned it enormous profits, people close to the firm say.
Goldman’s move also underscores the weakness in the Volcker Rule, which was designed to reduce the same type of risk-taking activities that led to the 2008 financial meltdown. Simply by labeling a trade “customer related” the firm can still make large market bets, and thus engage in some of the same risk taking the rule was designed to eliminate.
A spokesman for the firm had no comment, but people close to Goldman say Goldman will now be weighing other similar moves — taking traders out of the firm’s brokerage division and moving them to other areas of the firm where they can deal with clients and circumvent the rule.
Other Wall Street firms are watching Goldman’s moves closely and are considering similar measures. “If these traders become more client focused they can survive,” said a senior executive at one of the big banks.
Goldman Sachs is widely regarded as having the largest and the most aggressive proprietary trading operations on Wall Street, employing about 1,000 people. The other big operation is run by Bank of America (NYSE:BAC), through its purchase of the investment bank Merrill Lynch in 2008.
There are some indications that BofA is following Goldman’s lead. A Bank of America spokesman says the firm has no plans to fire its proprietary traders because most of the business now involves dealing with customers, as opposed to traders coming up with their own market ideas and then using firm capital to trade.
Press officials at JPMorgan (NYSE:JPM) and Citigroup (NYSE:C), which also have proprietary trading operations, didn’t return a call for comment. Morgan Stanley (NYSE:MS) has largely disbanded its proprietary trading business following massive losses taken during the financial crisis.