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Goldman Sachs May Continue 'Principal Investments' After Volcker Rule Implementation

Goldman Sachs Volcker

The Huffington Post   First Posted: 03/23/11 09:09 PM ET Updated: 05/25/11 07:40 PM ET

For at least one aspect of Goldman Sachs' operations, it may be business as usual after the Dodd-Frank financial reform bill is implemented.

Bank of America analyst Guy Moszkowski, who met with four Goldman executives in Hong Kong on Monday, published a note to investors saying Goldman will continue making "principal investments" -- longer-term direct purchases of securities, companies and property assets -- under the assumption that the practice is not in violation of the Volcker rule, a provision of the Dodd-Frank bill intended to limit the ability of taxpayer-backed banks to make trades with their own money, Bloomberg reports.

The Volcker rule explicitly bans banks from short-term trading of securities on their own behalf, but the restrictions do not seem to apply to princple investments, which are made over longer terms.

The principal investment loophole was first noted in November, when the Financial Times reported that American banks had found a way to continue betting their own money through certain types of trades. Volcker himself expressed concern about the practice at the time, the Wall Street Journal reported:

Mr. Volcker's concern, according to several people familiar with the matter, is that narrow or prescriptive rules would invite gamesmanship on the part of banks and could allow firms to evade the rule's intent. Already, some banks and their lobbyists are seeking to sway regulators and encourage them to narrowly define certain types of trading activities, according to government officials. [...]

At a congressional hearing earlier this year, Mr. Volcker said regulators should adopt a Potter Stewart-like approach to determine what runs afoul of the law, referring to the former Supreme Court justice who said of pornography, "I know it when I see it." Mr. Volcker's version: "Bankers know what proprietary trading is and is not. Don't let them tell you any different."

Since the Volcker rule was first proposed, Paul Volcker has been emphatic that his namesake rule be as airtight as possible. But even before financial reform passed, Volker was already "disappointed" by some of the compromises made, as The New Yorker's John Cassidy reported last year.

Read the full piece at Bloomberg here for more detail on Goldman's investment.

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