GS Spinoff Features Tech Issue - Analyst Blog

Goldman Sachs Group Inc. (GS) is facing an unanticipated technology problem related to its plan of spinning off part of its proprietary trading business, according to a report on CNBC.

A particular computer language called "Slang" was developed for internal usage for GS’ traders which play a key role in the company’s proprietary trading operations.  The company expects that the new spin-off trading company will not get the right to use the language.   Therefore, GS is working on translation of its trading programs into a more standard computer code so that it can be used thereafter.

Earlier on Thursday, GS planned to renovate its Principal Strategies Unit from its Equities Division.  This is a unit that makes bets with the bank’s own capital, into a fund and raise outside money.

The decision to spin off the unit of proprietary trading businesses followed the regulatory reform bill that became law in July 2010. A provision in the law called Volcker Rule, named after Paul A Volcker, the former Federal Reserve chairman, restricts banks from utilizing their money to speculate on trades in order to prevent huge risky bets.

According to the regulatory reform, banks will be restricted from proprietary trading and investing more than 3% of their capital in private equity or hedge fund investments in the long term. Proprietary trading has been a pivotal source of investment bank profits and the step is an attempt to minimize the speculation on banks, which might be the reason of the recent financial crisis.

At present, GS has more than 27% of its capital invested in such entities, followed by Morgan Stanley (MS) at 9%; Citigroup Inc. (C) and Bank of America Corporation (BAC) each having 4%.  Such portion of investment in entities will affect the bank’s trading revenues to a greater extent in the coming years.

Apart from Goldman, many other U.S. banks including Citigroup, Bank of America Corporation, JPMorgan Chase & Co. (JPM), Wells Forgo & Company (WFC) and Morgan Stanley are trying to reduce their investments in hedge funds and private equity. Though the regulation will take several years before its effects can be seen, these banks are considering a number of options to comply with it.

In the upcoming quarters, we believe that though continuing pressure on trading revenues will hurt the profitability of GS, a slowdown in loan loss reserves like other large banks will support the bottom line.