Zero Hedge Is Delighted To Hear That Goldman Plans To Spin Off Its Prop Trading Desk
As regular readers know too well, a long-running peeve for Zero Hedge has been Goldman's purported ability to take advantage of its huge monopoly in flow trading to the benefit of its prop positions. In fact, Zero Hedge has engaged in direct communication with Goldman in the past on numerous occasions, in which we have alleged that Goldman's prop desk is bad, and Goldman, logically, took the opposite side. We have just learned that Goldman, according to CNBC, is preparing to spin off its entire prop trading division. We consider this a huge victory for capital markets, if indeed this rumor is true, and a huge loss for Goldman, which contrary to representations by Messrs. Viniar, van Praag and others, probably generates well over 50% of its revenue courtesy of some form of interaction with its prop desk. This is a small but critical start to fixing the improprieties of a leaking Chinese Wall" flow-vs-prop problem, that has allowed a two-tiered market to flourish over the past several years.
It would be the first move by the New York-based investment bank to adapt its business to comply with the U.S. financial reform package signed into law last month.
One analyst said such a move would be a positive for the bank, and Goldman shares climbed 1.7 percent to $155.77 in early-afternoon trading.
"It gets them out of the way of the Volcker rule without causing any deterioration in their earnings. Therefore it's a significant positive," said Dick Bove, analyst at Rochdale Securities.
A Goldman spokesman was not immediately available for comment.
Under the Volcker rule, named for former Federal Reserve Chairman Paul Volcker, banks are restricted from proprietary trading and have new limits on the size of private equity or hedge fund investments. Proprietary trading has been a key source of Wall Street investment bank profits.
The rule was a key, and sometimes contentious, provision in the financial reform legislation.
In recent months, Goldman has been a focal point for critics of the financial sector's ills leading into the 2008 crisis.
On July 16, Goldman paid $550 million to settle U.S. Securities and Exchange Commission civil fraud charges over how it marketed a subprime mortgage product to institutional investors.