As Wall Street scrambles to find the best and most profitable way to operate under the new financial reform law, Goldman Sachs Group Inc. — the firm that was expected to suffer the most under the legislation — could emerge practically unscathed.
Right after Congress passed the regulatory overhaul bill last month, analysts estimated that as much as one-tenth of the preeminent investment bank's earnings could vanish because of new restrictions on activities targeted by the regulatory overhaul.
FOR THE RECORD:
Goldman Sachs: An article in Business on Wednesday about the effect of the new financial reform law on Goldman Sachs Group Inc. said Goldman executives advised analysts that the firm did not expect the law to cost it any revenue. In fact, the executives said the firm did not expect a significant loss of revenue. —
More recently, however, top Goldman executives privately advised analysts that the bank did not expect the reform measure to cost it any revenue.
"The statement was perhaps surprising in its level of conviction," Bank of America Merrill Lynch analyst Guy Moszkowski wrote in a note to clients, "but we've learned to take such judgments from GS very seriously."
The contentious legislation has been viewed by some supporters as a way to rein in Wall Street, perhaps especially Goldman, which last year recorded net income of $13.4 billion.
The improved outlook for the bank comes as it and some other Wall Street firms are positioning themselves to operate in an environment of increased regulatory scrutiny — even though regulators still must nail down many of the specifics of the legislation and banks are expected in some cases to have years to comply.
"They've clearly seen the writing on the wall and are planning their moves ahead of time," said Jim Sinegal, a bank analyst at Morningstar Inc. "It's definitely a little sooner than I expected."
For example, Goldman has started to move some employees engaged in proprietary trading — the often lucrative buying and selling of securities on behalf of the bank itself — to other parts of the bank, where they will make trades on behalf of clients, according to people familiar with the situation. Under the new law, banks will be barred from conducting proprietary trading, a major source of revenue for Goldman.
Goldman also recently launched an operation to help clients that enter into derivatives contracts, which involve complex securities that will face greater restrictions and scrutiny. Derivatives received much of the blame for the financial crisis.
The law, signed by President Obama in July, could force the trading of derivatives, a big business line for Goldman, onto exchanges. Regulators might allow the trading of some contracts over the counter but require that the resulting payments be handled by a clearinghouse.
Either way, "we think we are well positioned to be a market leader under the new rules," said Jack McCabe, co-head of Goldman's derivatives clearing service business.
Richard Bove, a bank analyst at Rochdale Securities, said he had changed his view of the law's effect on Goldman.
"I thought this company was going to be really harmed by this bill; now I've figured out that it's not going to happen," he said. "They should win big here."
The financial reform also bars banks from keeping more than 3% of their total capital in hedge funds and private equity funds. Though it's unclear whether banks will still be able to manage such funds, Bank of America last week announced it had spun off an in-house private equity investment team. But the newly independent firm will continue to manage a $1.5-billion portfolio owned by the bank.
Morgan Stanley is expected to spin off its in-house hedge-fund operator. But JPMorgan Chase & Co. has said it expects to retain its Highbridge Capital unit, one of the largest hedge fund operators in the country.
Citigroup Inc. analysts recently reported that Goldman executives told them the law would force the firm to reduce its own private equity holdings, accelerating a reduction that had been underway. A Goldman spokeswoman declined to comment on the report.
One of the most talked-about changes facing Wall Street is the end to proprietary trading. A number of banks were already scaling back their proprietary trading operations because of losses incurred during the financial crisis. Citigroup and JPMorgan are said to be looking at moving employees in those operations to other trading functions, as Goldman has started to do.
Some on Wall Street had predicted the reform would trigger an exodus of traders and executives to hedge funds and other private firms that will not fall under the jurisdiction of the new regulatory regime. But with the adaptations the banks have been making, they have so far persuaded most of those employees to stay, industry insiders say.
Among those staff members, "some of the anxiety that was tied to this bill really dissipated after it was signed," said Ron Geffner, head of the financial services group at New York law firm Sadis & Goldberg.