Propping up Goldman

5 August 2010 By Hugo Dixon

The Wall Street firm needs a solution for its prop trading business to conform with the Volcker Rule. But that’s now small beer. The bigger deal is private equity. The answer will probably be to reinvent that business as an internal Blackstone, pulling in big fees from clients.

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Goldman Sachs is likely to reinvent its private equity business to rely almost entirely on external client money, according to people familiar with its thinking. It is also likely either to fold its proprietary trading business into its asset management division or to help individual traders set up their own hedge funds independently of the firm.

The Wall Street firm has been examining options for its private equity and proprietary trading businesses in the wake of the new U.S. financial reform legislation. Under the socalled Volcker Rule, banks are prevented from trading on their own account. They are also prevented from investing more than 3 percent of their Tier 1 capital in private equity or hedge funds. Goldman had $15.5 billion invested in such activities at the end of the first quarter and a further $12.1 billion of commitments. The Volcker Rule would limit its investments to $2.1 billion based on its firstquarter Tier 1 capital of $68.5 billion.

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