Goldman Sachs (GS) may face bad publicity, hostile Congressmen, and campaigns by shareholders to cut compensation, but it remains a money making machine. The bank has disclosed that it had 131 trading days last year in which it made at least $100 million in net trading revenue -- a new record for the bank. The data comes from the firm's 10-K and was first reported in the FT. The paper points out that Goldman's previous record was 90 days in 2008.Goldman took more risks on an average trade in 2009 than it did the previous year. The FT reports that "Its daily "value at risk" (VAR) – the most that the bank estimates that its traders could lose on a given day – was $218m in 2009, up from $180m during the previous fiscal year,"
The news gets to the heart of how Wall Street makes money, and how it does not. "Proprietary trading," when banks trade for their own accounts, can be highly profitable, and it can also be extremely risky. Hedge funds that take extraordinary risks often go out of business if their bets do not work. Goldman, as a bank, has access to funds because it has deposit-taking divisions. The core of the "Volcker rule" which is part of legislation being consider by Congress is that proprietary trading organizations should be separated from retail and commercial bank activity. Volcker, who was the head of the Federal Reserve from 1979 until 1987, believes that the government should not bail out proprietary trading organizations the way it would deposit-taking banks.
It's not clear whether Congress will pass laws that would limit proprietary trading rules at banks. But it's clear that the proceeds from trading can make up most of a bank's profits. That being said, investors in banks that trade on public markets would have more modest results, in some instances, if banks could not trade for their own accounts. On the other hand, banks that place too many losing bets could face tremendous losses.
Goldman's results were extraordinary. If Volcker's plan had been in place last year, it's not clear that Goldman could have posted the same numbers. That means it's not likely the Goldman's shares would be up over 90% in the last year. Volcker's rule can pit shareholder's interests against those of taxpayer's. It is still not clear who will win.
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