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Goldman Sachs Said to Close Fixed-Income Prop Group

Goldman Sachs Close Fixed-Income Prop-Trading Group
The new headquarters building of Goldman Sachs Group Inc. Photographer: Ramin Talaie/Bloomberg

Goldman Sachs Group Inc., the U.S. bank that relies on fixed-income trading for the largest portion of its revenue, will shut its Global Macro Proprietary Trading desk, a person with knowledge of the decision said.

The eight-person desk, which trades currencies and stocks as well as products tied to interest rates and other fixed-income markets, will close in the days ahead, said the person, who declined to be named because the decision wasn’t public. Stephen Cohen, a spokesman for New York-based Goldman Sachs, declined to comment.

“Keeping the prop business going will have little benefit and closing it will be seen as a positive move to comply with Dodd-Frank,” said Christopher Wheeler, a London-based analyst with Mediobanca SpA, who has a “neutral” recommendation on Goldman Sachs.

Morgan Stanley and JPMorgan Chase & Co. are among Wall Street firms breaking off or winding down such trading units to comply with the Volcker rule, a provision of the Dodd-Frank financial law that prohibits banks from betting capital for their own accounts. The intent was to avert losses that might cause the collapse of firms and the financial system.

The group reported results as part of Goldman Sachs’s fixed-income trading division, the person said. That division generated revenue of $13.7 billion in 2010, 35 percent of the firm’s total.

The Wall Street Journal reported the decision to close the trading desk yesterday.

Volcker Rule

Goldman Sachs last year shut down an equity proprietary-trading group, Goldman Sachs Principal Strategies, to comply with the Volcker rule. Pierre Henri Flamand, the former head of Goldman Sachs’s Principal Strategies group, retired last year to start his own hedge fund.

The bank said on Jan. 19 that earnings dropped 52 percent in the fourth quarter, its third straight quarterly decline.

Goldman Sachs’s shares climbed 90 cents, or 0.5 percent, to $168.81 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have risen 0.4 percent this year after dropping 0.4 percent in 2010.

Regulators are in the process of implementing the Volcker rule, which was passed as part of Dodd-Frank in July. The Federal Reserve confirmed last week that banks would generally have two years to comply after the rule takes effect.

‘Robust Implementation’

Goldman Sachs Chief Financial Officer David Viniar said last month that there’s a chance some activities in the firm’s investing and lending segment won’t be allowed by new rules.

The company’s so-called special situations group, which invested in distressed assets such as Thai car loans and Japanese golf courses, shouldn’t be affected by the Dodd-Frank Act’s prohibition on proprietary trading because most of the group “is actually a lending business,” Viniar told analysts on Oct. 19.

The Financial Stability Oversight Council, a group of regulators charged with preventing a repeat of the 2008 financial crisis, released a study Jan. 18 recommending a “robust implementation” of the Volcker rule that includes requiring banks “to sell or wind down all impermissible proprietary trading desks.”

Executives from companies including JPMorgan, Citigroup Inc., General Electric Co.’s GE Capital unit and Credit Suisse Group AG have met with Federal Reserve or U.S. Treasury Department officials since November to discuss implementation of the rule.

Morgan Stanley

Morgan Stanley, the world’s top merger adviser, said last month that it plans to break off its largest proprietary-trading group, Process Driven Trading, as an independent advisory firm by the end of 2012. New York-based Morgan Stanley may also turn its Equity Trading Lab proprietary group into an electronic client-trading unit, two people with knowledge of the matter said this month.

JPMorgan told traders in a commodity prop-trading group in August that their unit was being closed, a person familiar with the matter said at the time. The firm planned to close all prop trading groups, affecting 50 to 75 employees in fixed-income and equities prop groups, the person said.

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