Goldman Sachs Group Inc (NYSE:GS)’ CEO Lloyd Blankfein announced today that the firm would begin winding down hedge funds to comply with the Volcker Rule.
Lloyd Blankfein indicated the firm would begin winding down hedge funds and garnering private equity to comply with financial reforms created to restrain activities deemed riskier.
Goldman Sachs to comply with Volcker Rule
Blankfein announced at a Bank of America Corp (NYSE:BAC) conference that the bank’s move to begin winding down was in keeping with guidelines under the Volcker Rule that bans banks from trading from their own accounts. However, he emphasized that investment banking remained Goldman Sachs Group Inc (NYSE:GS)’s primary focus.
The Volcker Rule, named after former Federal Reserve chairman Paul Volcker, prevents banks from doing their regular business such as loans, mortgages etc. while trading on their own behalf.
Blankfein however indicated clients would continue to demand some services prohibited under Volcker and that while Goldman Sachs Group Inc (NYSE:GS) would still be permitted to co-invest with and provide liquidity to its investors, key businesses would no longer be as attractive as they once were.
JP Morgan Split From Private Equity Unit
During June, JPMorgan Chase & Co. (NYSE:JPM) announced its plans to break off its private equity unit as an independent firm.
JP Morgan’s private equity unit, One Equity Partners, however would continue to make direct investments on behalf of the New York-based bank for an interim period. One Equity Partners would still manage the bank’s existing group of portfolio companies.
JPMorgan Chase & Co. (NYSE:JPM) however clarified that the proposed changes to make the private equity unit independent weren’t a reaction to the Volcker Rule, which places limits on bank trading and investment activities. JPMorgan Chase & Co. (NYSE:JPM) has viewed the investments made by One Equity as a credit business and hence it would be outside the ambit of the Volcker Rule, one of the components of the Dodd-Frank financial legislation.
Earlier reports suggested Goldman Sachs Group Inc (NYSE:GS) was working on a way to get around some of the provisions of the Volcker Rule. The reports suggested Goldman Sachs Group Inc (NYSE:GS) would allow its clients to deposit money in accounts designated for Private Equity investment. The company would then combine that money with the bank’s own, and the capital of some partners. This is a slight deviation from a formal fund structure, but it was expected to be enough to allow the bank to avoid regulatory interference. The report also indicated Wells Fargo & Co (NYSE:WFC) was also using similar loopholes to allow it to move into Private Equity.
During the Bank of America Corp (NYSE:BAC) conference, Blankfein indicated he was confident the Volcker Rule would be constructed in a way that let the bank continue performing the services that clients needed. Else there would be such a clamor from the client base that the regulators would have to double back.