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Goldman Sachs Restructuring to Do End Run Around FinReg

The ink has barely dried on the Dodd-Frank financial reform bill, and already the mega-banks, who weren’t broken up in the legislation, have figured out ways around some of it’s “toughest” elements. This is from Fox Business, grain of salt, etc., but it’s what we heard companies might do about the Volcker rule previously:

Goldman Sachs 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 (sic) 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.

Fantastic! If there’s one thing I wanted to preserve in FinReg, it’s Goldman Sachs’ profits and risk taking (and Bank of America’s too: the article says they’re following Goldman’s lead).

There’s no reason why the regulators cannot ban this practice as proprietary trading by another name. But there’s also no reason they have to, given the discretion they have to shape the bill. In addition, the thousands of lobbyists swirling around the regulators as they write and implement the new rules will have a disproportionate influence on the process. Incidentally, many of those lobbyists are former financial regulators:

As the battle over toughened financial restrictions moves to a new front, the regulatory agencies that will create hundreds of new rules for the nation’s banks will face a lobbying blitz from companies intent on softening the blow. And many of the lobbyists the regulators hear from will be their former colleagues.

Nearly 150 lobbyists registered since last year used to work in the executive branch at financial agencies, from lawyers for the Securities and Exchange Commission to Federal Reserve bankers, according to data analyzed for The New York Times by the Center for Responsive Politics, a nonpartisan research group.

In addition, dozens of former lawyers for the government, who are not registered as lobbyists, are now scouring the financial regulations on behalf of corporate clients.

“The headhunters are out in force” to recruit former government regulators as lawyers and lobbyists, said Lawrence Kaplan, who was a senior lawyer at the government’s Office of Thrift Supervision and now works on banking regulation at the Washington law firm Paul Hastings.

The news on the international front is really no better, with the rules on leverage ratio from the Basel III process expected to be an astronomical 33:1, along with other concessions to the banks.

All they needed was to get the prying eyes of the “people” off them and move this into a realm they easily control, like the regulatory sphere. Without serious awareness and pressure, FinReg will go with a whimper.

UPDATE: In a sense, this does prove that the Volcker rule was not weak, but a legitimate regulation that big firms had to avoid by restructuring their business. Customers may actually have a say in the trading through the asset management firm, rather than the company trading on their own account. Of course, Goldman could call a “customer” virtually anyone, so the regulators will have to be vigilant about watching the trades. This would also lower the assets in any firm, reducing the impact of the Scott Brown exemption of 3%. And shifts into asset management firms may mean that the firm can’t bail out the funds or the investors. This may be more of a mixed picture than it suggests, but again, it’s all up to regulatory enforcement.

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David Dayen

David Dayen

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