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Volcker Rule May Give Goldman, Citigroup
Until 2022 to Comply More from Bloomberg
By Bradley Keoun - Jun 29, 2010 Email Share Print
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©2010 Bloomberg News
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June 29 (Bloomberg) -- Goldman Sachs Group Inc. and Citigroup Inc. are among U.S. banks that
may have as long as a dozen years to cut stakes in in-house hedge funds and private- equity units l TV
under a regulatory revamp agreed to last week.
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Rules curbing banks’ investments in their own funds would take effect 15 months to two years after
a law is passed, according to the bill. Banks would have two years to comply, with the potential for
three one-year extensions after that. They could seek another five years for “illiquid” funds such as
private equity or real estate, said Lawrence Kaplan, an attorney at Paul, Hastings, Janofsky &
Walker LLP in Washington.

Giving banks until 2022 to fully implement the so-called Volcker rule is an accommodation for Wall
Street in what President Barack Obama called the toughest financial reforms since the 1930s. The
Glass-Steagall Act of 1933 forced commercial banks such as what is now JPMorgan Chase & Co. to
shed their investment-banking units in less than two years.

“One of the big concerns for the banks was how to unwind these funds,” Kaplan said. “This takes a
lot of that argument away by giving them as much as 12 years to do so.”

The proposal, named for former Federal Reserve Chairman and current Obama adviser Paul
Volcker, 82, seeks to avoid future bailouts by curbing risk-taking and initially aimed to ban banks
from investing in hedge funds and private equity. It was “watered down” in final negotiations last
week, allowing lenders to invest as much as 3 percent of their capital in the funds, Deutsche Bank
analysts Matt O’Connor and Michael Carrier wrote in a note to clients last week.

Volcker’s View

Andrea Raphael, a spokeswoman for Goldman Sachs, declined to comment, as did Citigroup’s
Duncan Smith. Both banks are based in New York.

Partly as a result of last-minute changes to the wording of the bill, analysts, lawyers and
congressional staffers say it’s unclear whether the extension period for illiquid funds would run
concurrently with the other transition periods. That could mandate full compliance in less than 12
years.

Barclays Capital analyst Jason Goldberg wrote in a report yesterday that there would be a seven-
year transition period for the Volcker rule. Citigroup analyst Keith Horowitz wrote that banks would
have until 2018.

‘Nine Years’

“In our understanding, it is nine years,” said Mike Westling, a spokesman for Senator Jeff Merkley,
the Oregon Democrat who proposed changes to the rule that were later incorporated by Senator
Christopher Dodd, chairman of the Senate Banking Committee.

The Glass-Steagall Act gave banks one year to get out of the underwriting business. Their banking
licenses were subject to revocation if they were in violation six months after that.

A separate part of last week’s bill allows banks to provide “initial equity” in new funds to help “attract
unaffiliated investors.”

“There has to be something like that in there, to literally make it work,” said Jim Reichbach, U.S.
head of the banking and securities practice at Deloitte LLP. “Someone has to put the first dollar in.”

The banks must reduce their investments in each fund to less than 3 percent of total investor
contributions within one year of formation, according to the bill. They can apply for a two-year
extension.

No Capital Infusions

The Volcker rule forbids banks from stepping in with capital infusions or other forms of support
when their own funds fail. In December 2007, Citigroup agreed to assume $59 billion of assets
bought by “structured investment vehicles” sponsored by the bank. During the following two years,
Citigroup lost more than $3 billion on the SIVs, which were a kind of hedge fund that invested in
mortgage bonds, credit-card securities and other assets that soured amid the financial crisis.

Goldman Sachs has $29.1 billion of principal investments, Keith Horowitz, a Citigroup analyst, wrote
yesterday in a report summarizing the potential impact of the Volcker rule. JPMorgan has $8.88
billion and Morgan Stanley has $6.34 billion, wrote Horowitz, who doesn’t cover Citigroup.

Alyson Barnes, a spokeswoman for Morgan Stanley, declined to comment, as did Joe Evangelisti, a
spokesman for JPMorgan. The two banks are also based in New York.

In the case of Goldman Sachs and Morgan Stanley, investments in private-equity funds might pay
off before the Volcker rule requires an exit, based on regulatory filings.

‘Substantially All’

“Substantially all” of Goldman Sachs’s $11.5 billion of investments in private-equity, hedge funds
and real-estate funds are slated to be liquidated in the next 10 years, according to a company filing.
Morgan Stanley estimated in a filing that 60 percent of its $1.81 billion of private-equity investments
and 50 percent of real-estate investments will be liquidated within the decade.

Citigroup’s hedge-fund and private-equity business, Citi Capital Advisors, oversees about $14
billion, 38 percent of which is the bank’s own money, according to a marketing brochure for the unit
from April. At least four of the bank’s 14 hedge funds consist only of proprietary capital. Citigroup’s
Metalmark Capital Partners private-equity unit started a new fund last year with $1.7 billion of
capital commitments from the bank and its employees, according to the brochure.

The bank plans to raise more than $3 billion from outside investors for hedge funds and private
equity during the next two years, people with direct knowledge of the matter said this month. Such
fundraising would reduce the bank’s percentage of its own funds, they said.

The Volcker rule’s limits may still be enough to push banks to reconsider whether to stay in the
hedge-fund and private- equity business, said Randall Guynn, head of the financial- institutions
practice at Davis Polk & Wardwell LLP. The specter of future caps might deter would-be investors,
he said.

“They may think that there’s not enough skin in the game from the sponsors,” Guynn said.

*T

--With assistance from Craig Trudell, Dawn Kopecki, Yalman

Onaran and Michael Moore in New York. Editors: Alec McCabe,
David Scheer.

To contact the reporters on this story:

Bradley Keoun in New York at +1-212-617-2310 or
bkeoun@bloomberg.net.

To contact the editor responsible for this story:

Alec McCabe at +1-212-617-4175 or
amccabe@bloomberg.net.

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