The Banking and Strategy Initiative

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Meet the Volckers’ marathon Pt. V: The Goldman Sachs advantage (David Viniar)

David Viniar, CFO of Goldman Sachs is one of the venerable names on Wall Street that defend limitations of the Volcker Rule. Wall Street has been preparing itself for the worst manifestations of Volcker’s rule since 2008, barely two months into the AIG bankruptcy because many had seen the collateral crisis at the cusp of the housing crisis brought on nby the indiscrimnate participation by those left out since 2006 incl SocGen and Deutsche Bank from the pond and Morgan Stanley on the street.

Not that David Viniar’s bid to run with the law is not against the use of the complex ban to restrict Wall Street..

the rule underestimates the complexity of the financial markets, diminishes the role of banks in making money flow around the world to companies and countries, and could wind up causing banks to lend less and charge more for their services.

What the Goldman CEO probably meant is that he has new opportunities from the rule because the gray area of market making being limiting, much less capital will be set aside in illiquid sectoral exposures and nouveau securities, ebnabling the Wall Street firm’s talent to allocate Capital for the most liquid and profitable sectors ahead of the also rans trying to make a secondary buck on others’ calls.

At the Credit Suisse forum in Miami, his presentation highlighted (on the right) how cyclical factors were driving the industry with or without the fuzzball regulation, not in yet even pointing to the new market share opportunities in Europe with European banks out of steam and capital..

Mortgage banks have to pay the highest capital charges in the presentation , a 2.5 multiple, PE a 1.5 multiple of pre 2007 requirements.

International Credit products and domestic within the US still need twice the earlier Capital from the GS point of view, implying a 6% average in the new rules, that should force ants up the Europeans’ snoot too, still leveraged more than 40 times on average.

The CFO’s thrust in Miami was that the rules would allow them to deselect sectors and end up with defined minimums much higher where market making is indeed conducted, and as the maximum would be much the same, the average returns are unaffected

LatAm has indeed emerged the most profitable, (image on left) and East Europe and Asia are promising to pursue returns. European ban deleveraging is likely to result in half a trillion in asset sales, only less than half done yet

Goldman Sachs plans to bring LEvel 3 assets to less than 5% ofr $49 bln of balance sheet, carry lower daily liquidity and trade to a 11% Tier I common ratio target by 2013, a low risk balance sheet still ahead of most others and still a best in class firm/bank



The Reuters report on the Miami Big Head bash up was thus:

Viniar did not provide a target for Goldman’s return-on-equity, but in a slide presentation he indicated that if Goldman were to exclude profits and losses from businesses affected by the Volcker rule from 2004 through 2011, the bank would have had the same average quarterly returns with less volatility.

Goldman Sachs could thus very well stick to its 20% RoE target internally and show everyone how the Volcker is used once Dodd Frank’s remaining articles are tied into an effective law passed by Congress.



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This entry was posted on February 16, 2012 by in Financial Markets and tagged , , , , , , , .


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