Goldman Sachs Bids Its Cash Cow a Fond Farewell
Because of the impending implementation of the Volcker rule, Goldman Sachs (NYSE:GS) will find it much more difficult to derive profits from what has been the firm’s primary cash cow — its lucrative private equity business, which draws in $50 billion annually and reaps huge profits for the bank, its employees, and clients.
For more than 20 years, Goldman Sachs has courted investment business by explaining to clients that the bank and its partners were investing alongside each other. But that enticement will no longer be as useful once the Volcker provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act is finalized later this year.
The financial crisis prompted President Obama to form the President’s Economic Recovery Advisory Board, headed by former United States Federal Reserve Chairman Paul Volcker. He argued that a functioning commercial banking system was essential to the stability of the entire financial system, and so he proposed that banks be limited in their ability to engage in high-risk speculation. The rule will restrict financial institutions from making speculative investments that do not benefit customers. Therefore, Goldman Sachs will be forced to lower its own investment in its funds to just 3 percent, a decrease from approximately 37 percent…