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Goldman Sachs Continues Principal Investing, Moszkowski Says

The headquarters of The Goldman Sachs Group Inc. stands in this aerial photograph taken over New York. Photographer: Andrew Harrer/Bloomberg
The headquarters of The Goldman Sachs Group Inc. stands in this aerial photograph taken over New York. Photographer: Andrew Harrer/Bloomberg

March 21 (Bloomberg) -- Goldman Sachs Group Inc., the fifth-biggest U.S. bank by assets, will continue making principal investments with the firm’s own money because executives don’t think the so-called Volcker rule prevents the practice, a Bank of America Corp. analyst said.

The analyst, Guy Moszkowski, published a note to investors today after meeting last week with four Goldman Sachs executives in Hong Kong. New York-based Goldman Sachs doesn’t think U.S. legislation passed last year that bans proprietary trading and limits holdings in hedge funds and private-equity funds precludes buying stakes in companies and other assets, Moszkowski wrote.

“The market interpretation of Volcker rules is that this will be off-limits ahead, but GS believes that many such investments will remain permissible, and will be closing on a ‘meaningful’ one in China shortly,” Moszkowski’s note said.

On March 11, the China Insurance Regulatory Commission approved AXA Life Ltd.’s sale of a stake in Taikang Life Insurance Co. to buyers including Goldman Sachs, according to a statement on the Chinese regulator’s website. Goldman will get a 12.02 percent stake in Taikang Life Insurance, the statement said. The value of the stake hasn’t been disclosed.

Moszkowski said that Goldman Sachs’s return on equity, a measure of how well it reinvests capital, will exceed what investors expect if the firm is still allowed to invest on its own behalf. Yusuf Alireza, head of Goldman Sachs’s securities division in Asia, told Moszkowski that principal investments have historically been “one of the key drivers of Asia earning.”

Effect on ROE

“If the firm can indeed continue to take on these principal investments, we believe that ROE can well exceed what’s currently priced into the shares,” Moszkowski wrote. The shares, which closed at $159.96 on March 18, “discount a long-term ROE of not more than 11 percent.”

The stock advanced $1.50, or 0.9 percent, to $161.46 at 10:03 a.m. in New York Stock Exchange composite trading. Moszkowski rated the shares “neutral.”

Michael DuVally, a spokesman for Goldman Sachs, declined to comment.

Goldman Sachs in January changed the way it reports financial results, creating a division called Investing and Lending. Investing and Lending contributed 19 percent of Goldman Sachs’s 2010 revenue, making it the second-largest division on that basis after institutional client services, or sales and trading, according to Goldman Sachs’s annual 10-K filing with the U.S. Securities and Exchange Commission.

Local Offerings

The firm’s executives in Asia also said Goldman Sachs needs to improve its ability to offer local products to local clients in key markets, the note said. The firm has applied for banking licenses in India and China and, while the firm’s executives think the India license could be granted in three to six months, Goldman Sachs has waited for years for its China banking license, the note said.

Moszkowski speculated that Goldman Sachs could try to speed the process by acquiring a small, weak Chinese lender. Goldman Sachs “would be providing a service to the Chinese banking authorities by taking a problem off their hands, in exchange for which it would be able to take over an existing bank license.”

To contact the reporter on this story: Christine Harper in New York at

To contact the editor responsible for this story: David Scheer at

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