This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Volcker Stealing Goldman Sachs' Mojo: Analyst

NEW YORK ( TheStreet) -- Goldman Sachs (GS) might lose its sheen if the current draft of Volcker rules are implemented, Bernstein Research analyst Brad Hintz said in a note on Friday.

The latest draft of the rule, which seek to limit the amount of risk firms can take with their own capital, could bring about changes to the fixed income trading model if implemented and ultimately lead to banks cutting back the amount of capital allocated to trading businesses in order to generate a reasonable return on equity.

For Goldman Sachs, which has historically brought in sales and trading revenues well above peers, the days of its outsized success might be over, according to Hintz.

According to Hintz, the "guilty until proven innocent" theme in the Volcker draft rules attempts to "minimize aberrations in trading performance among firms." "We believe the spirit of Volcker attempts to limit outsized risk taking by individual firms, but may effectively narrow the gap between the Street's best traders and peers," the analyst writes.

In the period between 2002 and 2006, Goldman continually outperformed on sales and trading revenues, even though it reported losses on 20% of the days over that period compared to an average of 5% among its peers. The trading success was largely attributable to "a more sophisticated and granular capital and risk allocation system that, combined with its risk management processes, is inherent to the firm's partnership culture." A culture, Hintz, says that has traditionally been impossible to duplicate.

Still, with the implementation of the Volcker rules, Goldman will have to go through a major overhaul.

"We expect Goldman to implement changes within its global fixed income and institutional equities businesses to automate market making activities; reduce staffing on trading floors and shrink overhead to enhance business margins," Hintz wrote. "The balance sheet usage of trading will be tightly constrained and flow will be pursued in an attempt to provide liquidity while using less capital. Turnover rates of inventory, revenue sources, risk metrics will be tightly monitored to stay within the Volcker limitations."

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
MS $38.20 0.00%
AAPL $130.28 0.00%
FB $79.19 0.00%
GOOG $532.11 0.00%
TSLA $250.80 0.00%

Markets

DOW 18,010.68 -115.44 -0.64%
S&P 500 2,107.39 -13.40 -0.63%
NASDAQ 5,070.0260 -27.95 -0.55%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs