Goldman Principal Strategies Group

Goldman Sachs Said to Be Disbanding Principal Strategies Unit (Originally Posted: 09/03/2010)

There goes another....

Goldman Sachs Group Inc. is shutting its principal-strategies business, a group that makes bets with the firm’s own capital, to comply with new U.S. rules aimed at curbing risk, two people with knowledge of the decision said.

Wall Street’s most profitable investment bank plans to hold off on announcing the wind-down while the 65 to 70 members of the global unit seek new jobs, the people said, speaking anonymously because the internal discussions about the process are confidential. Some traders and support staff may get roles within the firm, while a team in Asia may raise money for a new hedge fund, the people said.

Ed Canaday, a spokesman for New York-based Goldman Sachs, said he couldn’t comment.

Earlier plans for most members of the Principal Strategies group, led by Hong Kong-based Morgan Sze, to leave together and form a hedge fund were shelved, people with knowledge of the matter said. Now Sze, 44, may set up a fund with a smaller team focused on Asia, they said. Employees in London and New York are considering different options, the people said. The team’s members in New York, led by Bob Howard, are in talks to join another asset-management firm, according to two people.

Goldman Sachs, which says about 10 percent of its revenue comes from proprietary trading, is grappling with a provision of the Dodd-Frank financial reform act that prohibits banks from risking capital by betting for their own accounts. JPMorgan Chase & Co. plans to close its prop-trading units in response to the law, signed by President Barack Obama in July. JPMorgan last month told in-house commodities traders in London that they may lose their jobs, a person briefed on the matter said this week.

Roots to Rubin

Goldman Sachs Principal Strategies is housed within the firm’s equities division and traces its roots to the risk arbitrage team once led by Robert Rubin, who later became U.S. Treasury Secretary.

In 2007, about half the members of the Goldman Sachs Principal Strategies team, led by Raanan Agus, created a fund called Goldman Sachs Investment Partners that remains housed in the firm’s money-management division. Some traders who stayed in the principal-strategies unit, including its former global head, Pierre-Henri Flamand, and Ali Hedayat, left Goldman Sachs earlier this year to set up a London-based hedge fund called Edoma Capital Partners LLP.

Congress added the prohibition on prop trading to the financial reform package this year after Obama threw his support behind the idea, which had been championed by former Federal Reserve Chairman Paul Volcker. The so-called Volcker rule is an attempt to limit risky trading and investing by depositary institutions after the worst financial crisis since the Great Depression culminated in an unprecedented level of government support for the banking system.

The Dodd-Frank Act allows banks at least four years to bring their proprietary trading activity into compliance, with a potential extension of as many as three years, according to a timeline prepared by Davis Polk & Wardwell LLP, the New York law firm.