Ending prop just the start of Goldman’s make-over

November 9, 2010

Closing its proprietary trading desks is just one stage in Goldman Sachs’  make-over — and an early one at that. The Wall Street firm confirmed in a regulatory filing that it has “liquidated substantially all” the positions taken by its principal strategies group. The Volcker Rule mandated the move. But shuttering so-called prop desks is emblematic of a broader shift at the firm.

Goldman used to be the master of managing business conflicts, perceived or otherwise. Even though some clients would occasionally mutter that they suspected the firm’s traders were trading against them, Goldman convinced enough of them of its market nous to boost the number of its trading clients by half to 6,000 between 2006 and 2009.

Goldman was also the only major bank to keep its in-house private equity unit intact a few years ago while others folded theirs after buyout funds complained of having to compete with their lenders. Not that Goldman was immune to stepping over the line. In 2006 then-CEO Hank Paulson had to chastise some of his own bankers and private equity executives for collaborating a little too closely.

Of course, the Volcker Rule limits private equity as well. But potential conflicts lurk elsewhere, too, such as in structuring complex deals like Abacus, the mortgage security that led to a $550 million fine from the Securities and Exchange Commission. Or in advisory: rare though such deals are, it’s unlikely Goldman could — or would now want to — dominate a transaction like the New York Stock Exchange’s 2005 swoop for Archipelago. It advised both sides and owned a chunk of the exchange.

Eliminating conflicts won’t be easy: working its way around them is part of Goldman’s DNA. And there’s enough leeway in the Volcker Rule for suspicions to linger that banks can still make bets with their own money. Overcoming that will take time. But eradicating conflicts could help keep Goldman out of the news — and away from regulatory ire. Its partners would surely welcome that.

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