Goldman Sachs Said to Shut Principal Strategies Unit
Goldman Sachs Group Inc. is disbanding its principal-strategies business, one of the groups that makes bets with the firm’s own money, to comply with new U.S. rules aimed at curbing risk, two people with knowledge of the decision said.
Wall Street’s most profitable investment bank plans to hold off on announcing the wind-down while the 65 to 70 members of the global unit seek new jobs, the people said, speaking anonymously because the internal discussions about the process are confidential. Some traders and support staff may get roles within the New York-based firm, while a team in Asia may raise money for a new hedge fund, the people said.
“The Dodd-Frank bill caused them to have some damage to the business here and they said it’s done, let’s get rid of it,” Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York, told Bloomberg Television. “They’re saying, ‘We don’t want these people to be worrying about what they’re going to be doing a couple of years from now, we’re just going to get rid of the uncertainty.”
Goldman Sachs, which says about 10 percent of its revenue comes from proprietary trading, is grappling with a provision of the Dodd-Frank financial-overhaul act that prohibits banks from risking capital by betting for their own accounts. JPMorgan Chase & Co. plans to close its prop-trading units in response to the law, signed by President Barack Obama in July. JPMorgan last month told in-house commodities traders in London that they may lose their jobs, a person briefed on the matter said this week.
The Dodd-Frank Act allows banks at least four years to bring their proprietary trading into compliance, with a potential extension of as many as three years, according to a time line prepared by Davis Polk & Wardwell LLP, the New York law firm.
“What’s motivating people is that they need to know where they are going, and no one wants to be the last group out the door,” Gary Townsend, president of Hill-Townsend Capital LLC, said on Bloomberg Television. “It’s really the personnel decisions that are driving this to happen sooner rather than later.” Townsend’s Chevy Chase, Maryland-based investment firm specializes in financial companies.
Ed Canaday, a spokesman for Goldman Sachs, said he couldn’t comment. Goldman Sachs posted its biggest one-day percentage gain since May 2009 on Sept. 3, climbing $7.51, or 5.4 percent, to $147.29 in New York Stock Exchange composite trading.
Earlier plans for most members of the Principal Strategies group, led by Hong Kong-based Morgan Sze, to leave together and form a hedge fund were shelved, people with knowledge of the matter said. Now Sze, 44, may set up a fund with a smaller team focused on Asia, they said. Employees in London and New York are considering different options, the people said.
The team’s members in New York, led by Bob Howard, are in talks to join another asset-management firm, according to two people.
“It’s a hard capital-raising environment for hedge funds at the moment, even more so for start-ups,” said Don Steinbrugge, managing partner of Agecroft Partners, a Richmond, Virginia-based consulting firm that advises hedge funds and investors. “Only a small percentage of funds will be successful in attracting money and I think Goldman guys will potentially be part of that.”
Goldman Sachs Principal Strategies is housed within the firm’s equities division and traces its roots to the risk arbitrage team once led by Robert Rubin, 72, who later became U.S. Treasury secretary. Alumni of the division who have left to start their own hedge funds include Frank Brosens at Taconic Capital Advisors LLC, Thomas Steyer at Farallon Capital Management, Eric Mindich at Eton Park Capital Management LP, and Dinakar Singh at TPG-Axon Capital Management.
In 2007, about half the members of the Goldman Sachs Principal Strategies team, led by Raanan Agus, 42, created a fund called Goldman Sachs Investment Partners that remains housed in the firm’s money-management division. Some traders who stayed in the principal-strategies unit, including its former global head, Pierre-Henri Flamand, 40, and Ali Hedayat, 35, left Goldman Sachs earlier this year to set up a London-based hedge fund called Edoma Capital Partners LLP.
Congress added the prohibition on prop trading to the financial-overhaul package this year after Obama threw his support behind the idea, which had been championed by former Federal Reserve Chairman Paul Volcker, 82. The so-called Volcker rule is an attempt to limit risky trading and investing by depositary institutions after the worst financial crisis since the Great Depression culminated in an unprecedented level of government support for the banking system.
“This is the first of many situations,” Matt McCormick, a banking-industry analyst and portfolio manager at Cincinnati- based Bahl & Gaynor Inc., said today on Bloomberg Television. “We’re going to see other entities unwind their proprietary trading.”