Reports circled yesterday that Goldman Sachs (NYSE: GS) was getting ready to spin off its proprietary trading group. This would be great news ... right?
It'd certainly be great PR for Goldman, which has found its formerly gilded reputation a bit tarnished in the wake of the financial meltdown. This would make the company look like it's making nice with Uncle Sam, by getting right on top of complying with new rules under financial reform. It'd also be a nice moment for folks like Chris Dodd to crow, "Look, I did good!"
But if you'll allow me a bit of cynicism here, I have to wonder why Goldman would rush to make such a move. The letter of the law gives financial companies years to chop off their prop trading desks, and it seems like it would make little sense for Goldman to hurry up and lose that source of income.
So what's really going on? In the press coverage of the potential spinoff, I noticed the assertion that Goldman makes roughly 10% of its revenue from proprietary trading. But that number is pretty tough to pin down. In the most recent quarter, Goldman's Principal Investments group accounted for a bit more than 10% of revenue, but it was much less for all of 2009. Of course, the statement may refer to company's broader proprietary activities -- activities about which Goldman provides few specifics.
But we do know though that for 2009, the Trading and Principal Investments division put up 76% of Goldman's total revenue, and 87% of its pre-tax profit. Now for the multibillion-dollar question: How much of that is truly client-driven activity, and how much is proprietary?
Goldman Sachs is no longer the advisory-based company that it once was. It's a trading company. Now that the reform bill has passed, I'm thinking the company will tread very carefully, in hopes that regulators don't end up ripping apart its trading operations. If the rumors are true, I'd look at the quick move to spin off some proprietary activities as a peace offering, with the unspoken plea, "Please, Hammer, don't hurt us!"
Of course, this is also a big issue for many of the financial players, and we've already started to see reaction elsewhere. Morgan Stanley (NYSE: MS) is supposedly thinking about spinning off its FrontPoint Partners hedge fund, while Citigroup (NYSE: C) and Bank of America (NYSE: BAC) have both announced plans to shed private equity and hedge fund exposure. I don't expect that JPMorgan Chase (NYSE: JPM) will be far behind.
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