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Goldman Sachs Caught Prop Trading Again

Lloyd Blankfein

Despite new regulations and outright promises from CEO Lloyd Blankfein, Goldman Sachs is once again engaging in proprietary trading. A practice that lead to a $550 million fine from the SEC when Goldman Sachs mislead clients in order to promote its own accounts. The solution under Dodd-Frank to this behavior was the Volker Rule but now it seems Goldman Sachs is prop trading anyway:

Sitting onstage in Washington’s Ronald Reagan Building in July, Lloyd C. Blankfein said Goldman Sachs Group Inc. (GS) had stopped using its own money to make bets on the bank’s behalf.

“We shut off that activity,” the chief executive officer told more than 400 people at a lunch organized by the Economic Club of Washington, D.C., slicing the air with his hand. The bank no longer had proprietary traders who “just put on risks that they wanted” and didn’t interact with clients, he said.

That may come as a surprise to people working in a secretive Goldman Sachs group called Multi-Strategy Investing, or MSI. It wagers about $1 billion of the New York-based firm’s own funds on the stocks and bonds of companies, including a mortgage servicer and a cement producer, according to interviews with more than 20 people who worked for and with the group, some as recently as last year. The unit, headed by two 1999 Princeton University classmates, has no clients, the people said.

While Wall Street has been diligently working to undermine the Volker Rule through lobbying it is not clear if this secretive unit at Goldman cleverly sneaks through a loophole that was inserted into the original bill regarding long-term investing or just outright violates the law.

The team’s survival shows how Goldman Sachs has worked around regulations curbing proprietary bets at banks. Former Federal Reserve Chairman Paul A. Volcker singled out the company in 2009, saying it shouldn’t get taxpayer support if it focuses on trading. A section of the 2010 Dodd-Frank Act known as the Volcker rule, drafted to prevent banks from taking on excessive risk, limits short-term investments made with firms’ capital…

Their team at Goldman Sachs has bet against companies through short selling, or the sale of borrowed securities, and while investments are supposed to last for months they sometimes end early, according to half a dozen former members.

“MSI is very much like a hedge fund,” said Ashkan Marsh, 30, who worked for the unit before leaving the firm in 2008.

Goldman Sachs, the fifth-biggest U.S. bank by assets, doesn’t report on the holdings or performance of MSI, or of the Special Situations Group in which it’s housed.

Maybe after the next crash we can have real Wall Street Reform.

Photo by Asa Mahat | Fortune Live Media under Creative Commons license

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Dan Wright

Dan Wright

Daniel Wright is a longtime blogger and currently writes for Shadowproof. He lives in New Jersey, by choice.