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) --


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sale of its Phibro energy trading unit to

Occidental Petroleum

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may ultimately prove to be of little significance, but there is also a distinct possibility that the transaction signals a dramatic shift in how much risk banks are allowed to take.

Richard Bove, analyst with Rochdale Securities, is in the second camp, arguing that regulators and members of Congress are determined to castrate large banks. Among the changes he sees coming is one that would prohibit banks from using their own capital to make directional bets on the market -- a practice known as proprietary trading.

Banks often like to say they do very little proprietary trading, and it can be hard to draw bright lines between proprietary trading and so-called market making, which refers to the matching of buyers and sellers. Still, it is probably safe to say that proprietary trading has regularly caused swings of more than a billion dollars in quarterly profit or loss at many of the world's largest banks, including

Morgan Stanley

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JPMorgan Chase

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Bank of America

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Credit Suisse


Deutsche Bank

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. Probably no institution is more associated with proprietary trading, however, than

Goldman Sachs

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Bove says he's spoken with a number of investors that have been visited by former Federal Reserve Bank of New York President Gerald Corrigan, now a Goldman Sachs executive, who they say is extremely concerned about a severe regulatory clampdown on proprietary trading that would go to the heart of Goldman's business.

"He's been on the road speaking to large investment funds, particularly those that own Goldman Sachs' stock, and this is the issue," Bove told


. "The issue quite simply is that 'we are at risk of not being able to facilitate your trades because the government is not going to allow us to put capital on the desk, because it doesn't fit with their new view of how capital should be used in a banking company.'"

Bove continued: "

What he's trying to explain to these funds is the government is not making a distinction between using money for direct proprietary trades and using money to facilitate block trades. His

Corrigan's argument of course is your business is going to be dramatically negatively impacted if this goes through, because liquidity is going to come out of the market and you won't be able to trade when you want to trade."

Goldman Sachs spokesman Michael Duvally says Corrigan "does not recollect making any such comments to anyone on the buyside

Wall Street slang for large institutional investors."

On Friday, Duvally sent me an excerpt of a speech Corrigan was to make over the weekend. It consists of two lengthy paragraphs that argue financial intermediaries like Goldman that match buyers and sellers provide "liquidity that is essential to the efficiency and price discovery traits of financial markets." The speech -- at least this section of it -- hardly sounds like a call to arms to stop the regulatory madness.

"Preserving the market making function is vitally important and requires that the risk taking associated with market making is prudently managed and appropriately capitalized," the speech reads.

Market making is not proprietary trading, though, again, it can be hard to make a clear distinction at times. If Corrigan is genuinely concerned about "preserving the market making function," in other words, if he believes it is in danger, that is news indeed. The securities business as we know it would radically change without market making. It is hard to understand how it would exist at all. But I am probably reading too much into those few words.

Even if regulators were to find a way to allow market making while shutting down proprietary trading, it would be a dramatic change. It is hard to believe the Obama administration, which has so far seemed fairly moderate in its approach to regulation, would sign off on rules that would genuinely put banks out of the proprietary trading business. But far, far stranger things have happened in finance in just the last two years.

Written by Dan Freed in New York