Goldman Sachs to Spin Off Proprietary Trading Unit
Goldman Sachs announced that they are likely to spin off their proprietary trading operations to third-party asset management companies in compliance with the Volcker Rule. Though the proprietary trading desk will no longer be seeded with the money of Goldman’s clients, Goldman will establish management contracts and continue to operate a proprietary trading division. Though full implementation of financial regulation is likely five or ten years away, Goldman is getting its ducks in a row and will likely establish the management companies as early as this month.
The financial regulation bill established new limits regarding the amount of bank capital that can be invested for the bank, rather than the customer. According to the Volcker rule, no more than 3% of the bank’s equity can be in proprietary trading. Instead, the money must be invested for the customers of Goldman Sachs and returned in the form of higher interest rates. Currently, Goldman has about 28% of their Tier 1 capital invested in their proprietary trading units.
It is uncertain whether this will help or hinder Goldman’s earnings in the future. It is uncertain whether Goldman will be able to hit earnings estimates in the short term, in particular, during the transitional period. I would not be holding Goldman during earnings season, but I know better than to bet against an extremely successful investment bank.
In my opinion, these changes will ultimately benefit Goldman Sachs. Who wouldn’t want to invest in a proprietary trading business managed by their extremely savvy traders and computer algorithms? I doubt they will have an issue finding private equity capital to fund the new asset management divisions. Investors agree. Goldman is trading up since the announcement.
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