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Goldman Sachs Already Finding A Work Around For Volcker Rule

Lloyd Blankfein

More evidence the Dodd-Frank reform law was an exercise in futility as Reuters reports Goldman Sachs may have already found a work around. Under the new law investment banks such as Goldman Sachs are supposed to be prohibited from making risky private equity investments under the Volcker Rule. But sources reveal that Goldman has simply altered some of the structure of the financing in order to bypass the rule.

The Volcker rule – named for former Federal Reserve Chairman Paul Volcker and part of the Dodd-Frank financial reform law – is expected to limit bank investments in private equity funds, but not necessarily private equity-style investments outside of a formal fund structure. The rule’s main goal is to prevent federally insured banks from gambling in the markets or taking on too much risk with hedge funds and private-equity funds.

In a bid to pool money for deals without raising a private equity fund, the Wall Street bank has been lining up clients who are willing to put money into accounts set up to invest in private equity-style deals, the sources said. Goldman would also set aside some of its own money and partner capital into separate accounts for the same purpose, they said.

Under the new plan, Goldman would then make investments in a syndicate fashion, contributing investor money, along with its own capital and partner dollars, the sources said.

The difference being the money will not be pooled into a fund. That’s it. No real difference just a quick tweak and there goes the Dodd-Frank regulations.

“It is the same pitch as before, ‘We are putting a lot of our own money in this,'” said a person familiar with Goldman’s marketing of the new business. “They are saying, ‘We are still in this business.’“…

Goldman is betting that its investments not tied up in funds will be protected from Volcker rule.

So Goldman Sachs can still engage in the same kind of  investment activity it did before the crisis free of Dodd-Frank. What’s changed? Now Goldman, along with the other Too Big To Fail banks, has a federal bailout guarantee – which is even less of an incentive to manage risk well for the long term.

In exchange for the bailouts America was promised regulation of Wall Street but as banksters evade the weak regulations the only substantive and lasting reform seems to be institutionalizing Too Big To Fail and creating an unarrestable class of businessmen.

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.