Goldman plans to spin off prop trading

[Andy Nguyen]

North Carolina (Reuters) - Goldman Sachs Group Inc plans to spin off its proprietary trading business as early as this month to comply with the so-called Volcker rule, CNBC reported on Wednesday.

It would be the first move by the New York-based investment bank to adapt its business to comply with the U.S. financial reform package signed into law last month.

One analyst said such a move would be a positive for the bank, and Goldman shares climbed 1.7 percent to $155.77 in early-afternoon trading.

"It gets them out of the way of the Volcker rule without causing any deterioration in their earnings. Therefore it's a significant positive," said Dick Bove, analyst at Rochdale Securities.

A Goldman spokesman was not immediately available for comment.

Under the Volcker rule, named for former Federal Reserve Chairman Paul Volcker, banks are restricted from proprietary trading and have new limits on the size of private equity or hedge fund investments. Proprietary trading has been a key source of Wall Street investment bank profits.

The rule was a key, and sometimes contentious, provision in the financial reform legislation.

In recent months, Goldman has been a focal point for critics of the financial sector's ills leading into the 2008 crisis.

On July 16, Goldman paid $550 million to settle U.S. Securities and Exchange Commission civil fraud charges over how it marketed a subprime mortgage product to institutional investors.

http://www.reuters.com/article/idUSTRE6734CD20100804

 

[Princeton Man]

hmmm......interesting. Does this influence quant positions in that business sector ?

 

[bob]

Looks like they will be spinning off all or part of their PE operations as well. I will be very interested to see what the resulting structures look like, and who else is involved in the deals.

 

[DominiConnor]

I predicted this as a trend even before Volcker.

"Too big to fail" has two meanings, both false.
Too big to be allowed to fail has caused much pain, but before the crisis most people thought that the huge firms gained useful diversification through being in all kinds of banking, enough that no plausible event would kill them.

We were wrong.
It turned out that it created more ways in which something could go terribly wrong.

Fact is that all forms of business can screw up so badly that it not only dies but takes others with it. GS, like most large outfits is actually 2-300 companies, maybe more. But "limited liability" doesn't really help much.

Also the rational appetite for risk of the thousand or so distinct types of business carried out by GS, does not synchronise well. Thus a unit may be held back, merely because others are doing badly.#

Further, how do you "add" the risk of prop FX to equity options market making ?
and add that to counterparty risk in swaps, etc ?

Sure you can Monte Carlo that, but its about as reliable as trying to drive blind using only your hearing.

So the rational breakdown is businesses whose risk can be managed, and whose downfall is catastrophic for no one except those who work there.

I imagine a world where a "bank" is more like the owners of a mall, who provide capital, resources, space, etc

 

[Andy Nguyen]

Some update: GS prop unit to become fund
http://www.reuters.com/article/idUSN0525493120100805

 

[Joy Pathak]

Some update: GS prop unit to become fund
http://www.reuters.com/article/idUSN0525493120100805

I wonder how much money they will be able to raise.

 

[Andy Nguyen]

GS is scrambling to hire C++/C# programmers for its prop-trading-turn-hedge-fund. Apparently, the new spin off does not have the right to Slang, the internal proprietary language used for many of GS trading operation so they are in a rush to hire programmers to translate code from Slang to the more standard languages such as C++, C#, etc

Goldman Faces Technology Issue With Spinoff - CNBC

 

[sampadm]

I think it is a smart move by Goldman to get into the market earlier than its competitors. Wondering if they can pump there own money into this fund? If yes then the spinoff, I guess, will work quite well for them.

 

[DominiConnor]

I've heard this about the new entity as well, that's a clusterfuck on a truly evangelical scale of stupidity.

I'm not a fan of Slang, but to replace such a nearly ubiquitous part of the technical infrastructure is several years of very hard work.

Even translating the code directly is intensely and viciously hard.

Translating a = b / c

Can produce different results in different programming languages. I've actually done transliteration of code as part of my work, and it's a miserable slog of tedium and inexplicable bugs.

I am rarely shocked, being old, cynical and seen the awesome incompetence of JPM IT at point blank range. But if this is really the case, headhunters like me will not only make serious money, but have a good laugh about it as well.

 

[Andy Nguyen]

This time, we are closing for real

Goldman Sachs Group Inc. is shutting its principal-strategies business, a group that makes bets with the firm’s own capital, to comply with new U.S. rules aimed at curbing risk, two people with knowledge of the decision said.

Wall Street’s most profitable investment bank plans to hold off on announcing the wind-down while the 65 to 70 members of the global unit seek new jobs, the people said, speaking anonymously because the internal discussions about the process are confidential. Some traders and support staff may get roles within the firm, while a team in Asia may raise money for a new hedge fund, the people said.

Ed Canaday, a spokesman for New York-based Goldman Sachs, said he couldn’t comment.

Earlier plans for most members of the Principal Strategies group, led by Hong Kong-based Morgan Sze, to leave together and form a hedge fund were shelved, people with knowledge of the matter said. Now Sze, 44, may set up a fund with a smaller team focused on Asia, they said. Employees in London and New York are considering different options, the people said. The team’s members in New York, led by Bob Howard, are in talks to join another asset-management firm, according to two people.

Goldman Sachs, which says about 10 percent of its revenue comes from proprietary trading, is grappling with a provision of the Dodd-Frank financial reform act that prohibits banks from risking capital by betting for their own accounts. JPMorgan Chase & Co. plans to close its prop-trading units in response to the law, signed by President Barack Obama in July. JPMorgan last month told in-house commodities traders in London that they may lose their jobs, a person briefed on the matter said this week.

Goldman Plans To Close Prop Trading (For Real This Time) | zero hedge

 

[sjain]

I think it is a smart move by Goldman to get into the market earlier than its competitors. Wondering if they can pump there own money into this fund? If yes then the spinoff, I guess, will work quite well for them.

pumping their own money in the fund? No as that would defeat the purpose of spinoff.. it will be interesting to see how this deal is structured and what remains in the end and how goldman recovers the pnl from its other businesses particularly from market making..