An investing operation avoids short-term moves to sidestep the Volcker Rule | “Our job is to grow the pie and make everybody wealthier”

Max Abelson

Goldman Sachs’s Hidden Trading Team


Sitting onstage in Washington’s Ronald Reagan Building in July, Lloyd Blankfein said Goldman Sachs Group had stopped using its own money to make bets on the bank’s behalf. “We shut off that activity,” the chief executive officer told more than 400 people at a lunch organized by the Economic Club of Washington, slicing the air with his hand. The bank no longer had proprietary traders who “just put on risks that they wanted” and didn’t interact with clients, he said.

That may come as a surprise to people working in a secretive Goldman unit called Multi-Strategy Investing that wagers about $1 billion of the bank’s own funds on stocks and bonds, according to interviews with more than 20 people who have worked for and with MSI, some as recently as last year.

The unit, headed by two 1999 Princeton University graduates, has no clients and illustrates how Goldman Sachs worked around regulations curbing proprietary bets at banks. A section of the 2010 Dodd-Frank Act known as the Volcker Rule, after former Federal Reserve Chairman Paul Volcker, limits short-term investments banks can make with their own capital. The law, drafted to prevent federally backed banks from taking on excessive risk, doesn’t bar longer-term wagers. The latest proposal for implementing the rule defines short-term trades as those lasting 60 days or less. Michael DuVally, a spokesman for Goldman Sachs, wrote in an e-mail that MSI engages only in long-term investing and lending. “We have made changes to the strategies this business historically has employed to bring them into compliance with our current understanding of the Volcker Rule,” he said. “If the final rule requires additional changes, we’ll make them.”

To comply with Dodd-Frank, banks including Morgan Stanley and JPMorgan Chase have said they would break off or wind down proprietary units. “We should not be a firm that is betting our shareholders’ capital for our own benefit,” Morgan Stanley CEO James Gorman said in November 2011. “We should be working with our shareholders’ capital for our clients’ benefit.”

Goldman Sachs has been wagering its own money for decades. Under a team led in the 1980s by Robert Rubin, who became co-chairman of Goldman Sachs and later U.S. Treasury secretary, the bank used its own capital for risk arbitrage, or betting on takeover targets. That group grew into a proprietary trading operation known as the Principal Strategies team. A separate group known as the global macro desk speculated on currencies and interest rates. Blankfein’s comments about shuttered proprietary businesses referred to those two teams, DuVally wrote in his e-mail.

Avoiding short-term trading doesn’t eliminate risks, explains Matthew Richardson, an economics professor at New York University’s Stern School of Business. Months-long investments can also go awry, he says. “From a systemic-risk perspective, it’s really the longer-term holdings which are of issue,” says Richardson.

MSI, based in the bank’s New York City headquarters, is headed by Daniel Oneglia and Geoffrey Adamson. (At Princeton, Oneglia was treasurer of the eating club Tiger Inn, where his nicknames included “the Don” and “the Weasel,” according to the university’s website. Adamson was coxswain for the men’s heavyweight varsity rowing team.) Their team at Goldman Sachs doesn’t trade in and out of positions each day, say people who worked at the unit. Still, the group has bet against companies through short selling — the sale of borrowed securities — and while investments are supposed to last for months, they sometimes end early, say a half-dozen former members.

“MSI is very much like a hedge fund,” says Ashkan Marsh, who worked with the unit before leaving the bank in 2008. Marsh, now a Harvard Business School student, remembers a trip with colleagues to Texas, where portfolio analysis was accompanied by paintball and freshly slaughtered pork. The team paid “an extreme amount” to a farm that “killed the pig that day and barbecued it for us,” he says. Other former members also refer to the team as a hedge fund. G. David Bednar, a managing director at Ladder Capital Finance, worked at Goldman Sachs’s “proprietary multi-strategy hedge fund,” according to his LinkedIn profile. Bednar declined to comment.

Goldman Sachs doesn’t report on the holdings or performance of MSI, or of the Special Situations Group in which it’s housed. That parent group uses the bank’s funds to profit from distressed and middle-market companies, and has been a major profit center at Goldman Sachs — sometimes the biggest, former executives said in 2011.

At the lunch in Washington where Blankfein spoke, he was asked by David Rubenstein, co-CEO of private equity firm Carlyle Group, if Goldman Sachs makes the bulk of its profit from proprietary instead of client work. Blankfein said the firm no longer wagers its own money without client interaction. “Our job is to grow the pie and make everybody wealthier,” he said. “Not for the venality of trying to get richer and more wealthy, but wealth in the sense of making the world stronger and healthier. And, for lack of a better word, better.”

The bottom line While Blankfein says Goldman Sachs doesn’t trade with its own money, Multi-Strategy Investing acts like an internal hedge fund.


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