It's been a monumental afternoon. Goldman's negative Q4 compensation accrual was a mere tadpole to Obama's whale. Something not dissimilar to the resurrection of Glass Steagall is implied by Obama's intention to...
...work with Congress to ensure that no bank or financial
institution that contains a bank will own, invest in or sponsor
a hedge fund or a private equity fund, or proprietary trading
operations unrelated to serving customers for its own profit.
Here are some possible repercussions:
1) There will be a rush to established hedge funds
Remember Pierre-Henri Flamand, London-based global head of prop trading group Goldman Sachs Principal Strategies, and Raanan Agus, manager of internal hedge fund Goldman Sachs Investment Partners, both of whom are supposed to be earning more than $10m this year? Their services, and those of their immediate colleagues, will now be surplus to requirement. The likes of Brevan Howard, Marshall Wace and Citadel can only benefit.
2) There will be a rush to established private equity funds
Remember Richard Friedman, global head of merchant banking, Goldman's private equity division)? He's also supposed to be earning $10m this year and he and his colleagues are also passé.
3) There will be some serious thoughts about Geneva
So far, Obama's plans only apply to the US. Gordon, however, is sure to follow. Maybe if banks based themselves in Geneva they could stay intact?
4) Merrill Lynch may free itself of BofA
This is possibly what most ex-Merrill people want anyway. It could be good for morale. Apparently plans are already afoot.
5) Bob Diamond may go it alone
The Conservatives are promising to follow Obama's lead, which is bad news for a) RBS, and b) Barclays. Barclays has had the great good fortune to spin off its private equity arm already, but having laboured to integrate Lehman in the US, is Bob Diamond really going to want Barclays Capital to operate within the new restrictions that being part of a very large retail bank will entail?
6) Protiums will proliferate
Remember October? Remember when Barclays sold $12.3bn of loans to Protium Finance, a fund staffed by two of its former employees? Expect a lot more of the same.
7) Most prop traders will be OK
In targeting prop traders, it seems that the US government has gone for the pure prop traders of the kind who sit in a secluded area taking risks on behalf of the bank, with no knowledge of what goes on elsewhere. These prop traders aren't unimportant (particularly at Goldman Sachs where they account for ~10% of total revenues), but there are also many prop traders who sit alongside flow desks and act to hedge risk for banks as part of the market making process. They should be fine.
