Wall Street bank giants agonise over mass sell-off

Hugo Duncan
25 Jan 2010

Goldman Sachs was looking today at offloading its US banking business amid Barack Obama's dramatic clampdown on Wall Street.

Officials at the investment banking giant have discussed selling or spinning off its banking unit which has $36 billion (£22.3 billion) in deposits.

Rival Morgan Stanley could also be forced to sell FrontPoint Partners, its $7 billion Connecticut-based hedge fund, under the American president's proposed banking reforms.

Senior executives at FrontPoint were thought to have met to discuss the fall-out of the clampdown, including the possibility of buying the business back from the investment bank.

Morgan Stanley also has a stake in Lansdowne Partners, the London-based hedge fund that it bought into for $300 million in 2006.

The shake-up comes as the world's most powerful banks review their operations after Mr Obama's declaration of war on Wall Street last week.

The President stunned New York and the City with plans to ban banks which take customer deposits from betting on financial markets with their own money — known as proprietary trading — and running hedge funds and private equity groups. He also said banks should never be allowed to be “too big to fail”.

Mr Obama attacked a “binge of irresponsiblity” in which banks took “reckless risks in pursuit of quick profits and massive bonuses”. He also pledged to “fight” the “army of industry lobbyists from Wall Street” attempting to block reform.

Although the announcement lacked detail and financial stocks plummeted at the end of last week.

Paul Volcker, the former US Federal Reserve chairman behind Obama's plans, said there was still work to do before they become law: “The questions have to be worked on in detail.”

Congress is expected to include the proposals in the broader effort to overhaul regulation of the financial system.

Restricting ownership of hedge funds would undercut a hot growth area for banks in recent years.

During the hedge-fund boom before the financial crisis, banks snapped up hedge fund stakes.

Executives at JPMorgan Chase are looking at its ownership of hedge fund Highbridge Capital Management, although it is thought the Obama proposals will not cause a problem because the majority of the $21 billion in the fund belongs to clients rather than the bank.

George Soros, the billionaire financier, welcomed the proposed reforms. “If the legislation were carried through, it would certainly mean the end of Goldman Sachs as we know it,” he said.

But senior bankers heading to the World Economic Forum in Davos this week are expected to lobby regulators to stop many of the White House proposals being implemented. Regulators have also waged war on huge bonus payments to bankers so soon after the financial crisis tipped the global economy into recession.

Bankers at Goldman Sachs will this week find out how much they will be paid for last year — with 100 UK-based partners agreeing to cap their earnings at £1 million. However, many high-flyers who are below partner ranking will earn far more despite the firm claiming that it is showing “restraint”.