Analyst: Goldman Sachs shareholders to benefit from Volcker Rule


Facing possible Volcker Rule restrictions, Goldman Sachs--while willing to sell or shutter some proprietary trading units--has seemed determined to maintain its principal investing business, which continues to help it prop up earnings.

But an analyst at JPMorgan Cazenove has raised some doubt about that stance with a recent report that increased his recommendation to "overweight" from "neutral." The rationale behind the move is that the company will be in position to "release" some $28 billion of capital from the investing and lending segment, which includes the principal investing unit.

"What we believe is there's a transformation of the business from a client-plus-investing business to a client business and that will allow the group to release quite a bit of capital," Kian Abouhossein told Bloomberg.

This depends on how the Volcker Rule is ultimately implemented. But if Goldman Sachs ends up giving back roughly $28 billion of the $30 billion of capital currently used for proprietary activity, does that assume that principal investing will be cut back a bit? Or will it get by with $2-$3 billion devoted to this activity, which seems a bit on the small side?

One consequence of releasing the capital is that the firm will be in position to boost its return on equity. But that depends on bank returning this excess to shareholders. It may well use it to expand into other business lines.

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