Money & Company

Tracking the market and economic trends
that shape your finances.

« Previous Post | Money & Company Home | Next Post »

Dodd-Frank overhaul not hurting Goldman yet

April 19, 2011 | 12:54 pm

A provision in last year’s financial reform bill that was supposed to hurt Wall Street banks does not yet appear to be hitting the firm that was viewed as its main target, Goldman Sachs Group Inc.

The so-called Volcker rule is aimed at stopping banks from making big bets by investing or trading with their own money. The measure, named after its author, former Federal Reserve Chairman Paul Volcker, is intended to limit the risks taken by the banks, reducing the likelihood they would need to be bailed out.  

The provision has not yet been implemented by regulators, but Goldman has already publicly shut down a number of its most highflying trading desks in order to comply with the rule.

But Goldman’s first-quarter results, released Tuesday, show that revenue from the firm's own investments rose 39% from the first quarter of 2010, which was before the Dodd-Frank overhaul was enacted. Those investments, which Goldman calls "principal transactions," accounted for $2.6 billion, or nearly one-fourth, of total revenue last quarter. They included private equity and hedge fund transactions entered into before Dodd-Frank was adopted.

Many analysts have assumed these sorts of transactions would be barred under the Volcker rule. But Goldman executives have recently told analysts that they believe they will be able to continue with this activity.

"The market interpretation of Volcker rules is that this will be off-limits ahead, but GS believes that many such investments will remain permissible," Guy Moszkowski, an analyst at Bank of America, wrote in a note to clients that was excerpted by Bloomberg.

That could explain why soon after the financial overhaul was signed into law, when many saw the legislation as a blow to Goldman’s prospects, the bank’s executives said they did not expect the law to cause a big hit to revenue.

In other lines of business, Goldman’s first-quarter results weren't so stellar. The market-making desks that handle client trades, a big source of revenue in recent years, posted a 30% revenue drop from a year earlier.

Overall, the bank posted a $2.7-billion first-quarter profit, or $1.56 a share, down from $3.4 billion, or $5.56 a share a year earlier. The big decline in earnings per common share reflected a $1.6-billion one-time preferred-stock dividend that Goldman paid to Warren Buffett's Berkshire Hathaway Inc.

Late in Tuesday's trading session, Goldman's stock was down $1.83, or 1.2%, to $151.95.


Senate panel concludes Goldman Sachs profited from financial crisis

Goldman Sachs to change business practices

Goldman Sachs grows stronger even as reputation slides

-- Nathaniel Popper