Goldman Sachs Sets Up Secret Fund To Skirt New Financial Rules On Risky Trading

Goldman Sachs chief executive Lloyd Blankfein has said repeatedly that his bank would comply with the Volcker Rule, a new regulation from the Dodd-Frank Wall Street Reform Act meant to eliminate the most risky trades from banks that have the backing of the federal government and its taxpayers. Despite those promises, the bank has set up a secret fund that is still engaging in those trades, Bloomberg reports:

That may come as a surprise to people working in a secretive Goldman Sachs group called Multi-Strategy Investing, or MSI. It wagers about $1 billion of the New York-based firm’s own funds on the stocks and bonds of companies, including a mortgage servicer and a cement producer, according to interviews with more than 20 people who worked for and with the group, some as recently as last year. The unit, headed by two 1999 Princeton University classmates, has no clients, the people said.

Multiple sources Bloomberg cited referred to MSI as a “hedge fund,” the type of entity to which the Volcker Rule was meant to steer risky proprietary trading. But those funds, under the intent of the rule, were supposed to be independent from banks that have taxpayer backing. Goldman Sachs, an investment bank until the 2008 financial crisis, was classified as a bank holding company that year to give it access to the Federal Reserve’s emergency lending programs and federal government backing. Under the Volcker Rule, banks must give up such access, and the taxpayer backing that comes with it, to engage in prop trades.

Goldman’s insistence that MSI’s practices comply with the rule because they are long-term in nature is, however, another indication of the way banks can work the weakened rule in their favor. Wall Street lobbyists, with the help of Republican senators, watered down the rule before its passage and have sought to weaken it even further before it is fully implemented. The result was a rule with loopholes “big enough…that a Mack truck could drive right through it,” one that was so weak its namesake, former Fed Chairman Paul Volcker, was dissatisfied with it. Multiple former bank CEOs, however, have called on regulators to make the rule as strong as possible because it is “necessary to correct a mistake that poses a major risk to our economy.”