Even Goldman Sachs Couldn't Hedge This Loss

According to Reuters own @Lauren LaCapra, there is a serious brain drain going on at Goldman Sachs Group Inc's GS, the likes of which the bank has not seen in some time. There has been several who have left the North American government bonds and derivatives trading desk over the past few months, as bonuses have plunged on smaller, less risky bets. Instead, salespeople at the prestigious New York-based investment bank have been getting rewarded with higher salaries and promotions. This is likely due to the Volcker Rule, as the bank is shifting towards client trading more and less towards prop trading. Prop trading involves making market bets with the firm's own money. "The client franchise is paramount," said Susquehanna Financial Group analyst David Hilder to Reuters. "You need sales people to deal with and talk to the clients. Over the long term, that's more important than a few guys trading bonds." Among those who have left are Brian Mooney, a 22 year veteran of the bank, Glenn Hadden, the former head of Goldman's U.S. Treasury bond trading desk, and at least nine others. Mooney left Goldman to join Bank of America BAC, Hadden now works at Morgan Stanley MS and the others have spread out around Wall Street, including going to UBS AG UBS, Nomura Holdings Inc NMR, Jefferies Group Inc JEF and JPMorgan Chase & Co JPM, as well as on the buy side. "Working for Goldman is no longer different than working for anybody else," said one former Goldman trader who left this year. "At the same time, if you have Goldman on your resume, that's still a premium. People are monetizing the Goldman premium now because two years from now you won't be able to." If Goldman is no longer "Goldman," then will it no longer be "Government Sachs?" It is too soon to tell whether the bank is really losing its prestige or if it is going through a dry spell. Either way, the Volcker Rule has had a larger effect on Wall Street than anyone expected. Even Lloyd Blankfein couldn't hedge his way out of this one. This sudden "brain drain" might be one glaring loss Goldman has to show on its balance sheet. ACTION ITEMS:

Bullish:
Traders who believe that Goldman is losing its prestige might want to consider the following trades:

• Goldman's own people believe that the firm is losing its prestige. Goldman's trading revenues were way down last quarter, while some competitors, particularly, Morgan Stanley knocked the cover off of the ball. We could be witnessing a changing of the guard on Wall Street, with Goldman sinking and Morgan rising. Traders could consider going long Morgan Stanley (MS)

Bearish:
Traders who believe that Goldman is going to rebound eventually may consider alternate positions:

• The firm has a lot of problems. Their reputation has been severely battered in the wake of the financial crisis, and profits and revenues are way down. The firm has been hamstrung to a degree by Dodd-Frank, and is not able to generate huge trading profits anymore. Despite all of this, Goldman continues to bring in the smartest of the bunch and is trading well below book value. Goldman will eventually figure out a way to be Goldman again and shareholders who take advantage of the weakness here will benefit.

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