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Can Obama’s Wall Street reform address Greg Smith’s problem with Goldman?

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Greg Smith’s biggest complaint about Goldman Sachs in his New York Times op-ed is the way he thinks the firm forsakes its clients’ interests in the name of bigger profits. And that’s precisely the problem that one of the most sweeping and controversial parts of Dodd-Frank is meant to address. The Volcker Rule prohibits banks that are backed by government guarantees from making speculative bets that don’t benefit their customers — in other words, it’s a ban on what is known as proprietary trading. AP

The Volcker rule hasn’t been finalized yet, and its July start date could get pushed back. But the impending change has already prompted some of the biggest banks, including Goldman Sachs, to shut down or spin off their proprietary trading desks. Goldman recently closed two prop trading desks in anticipation of the Volcker Rule. According to one analyst, Volcker could affect as much as 20 percent of Goldman’s trading revenue, and the rule will fall heavily on Morgan Stanley as well.

The problem is, it has proved enormously difficult for regulators to distinguish proprietary trading from the kind of trading that’s meant to benefit clients, leading to fears that the rule is too broad. That’s largely why the Volcker Rule has stirred up such overwhelming criticism from many involved in the financial industry — and not just from big banks like Goldman Sachs.

The firestorm around Smith’s op-ed, however, has drawn renewed attention to how Goldman and other banks treat their clients’ money — and caused the firm to lose $2.15 billion in market value in a single day. What’s more, Goldman has already been accused by the Securities and Exchange Commission of intentionally misleading clients by selling them mortgage securities while betting that the market would crash. Goldman settled that suit for $550 million but denied any misconduct, and no individual executives were punished as a result.

That said, Smith’s disillusionment with Goldman had more to do with the culture of the firm than with any specific trading practices, so he and his sympathizers aren’t likely to be satisfied with technical fixes. Paul Volcker himself made a few remarks on the issue, reported here.

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