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To get right with the Volcker rule, banks look to sell private equity stakes

Goldman Sachs Group, Inc. Chairman and CEO Lloyd Blankfein, right, and Bank of America CEO Brian Moynihan, walk out of the West Wing of the White House in Washington, Wednesday, Oct. 2, 2013, to speak to reporters after they and other financial leaders met with President Barack Obama regarding the debt ceiling and the economy.
AP Photo/Charles Dharapak
Washington has left bank CEOs with assets to peddle.
  • Tim Fernholz
By Tim Fernholz

Senior reporter

Published This article is more than 2 years old.

With the Volcker rule finalized, banks are again selling off investments in hedge and private equity funds that lawmakers say are too risky for banks insured with taxpayer money.

Citi may sell a $1 billion stake in a private equity fund, the Wall Street Journal reports; last year, Citigroup sold $8.5 billion in private equity holdings. Elsewhere, JP Morgan is looking to sell a $4 billion private equity unit. (Private equity funds invest directly in companies, typically purchasing majority stakes in firms, funding start-ups or large real-estate projects.)

This divestment process actually began back in 2010. That’s when the Volcker rule was  written into that law overhauled the US financial regulation system, known as Dodd-Frank. It was in 2010 that Goldman Sachs sold off its proprietary trading desksort of.  Other banks have already jettisoned other financial lines of business that are verboten under Volcker. Bank of America, for example, sold its private equity operations a while back, and Citigroup has unloaded similar business lines.

But two banks will be particularly affected: Goldman still garners huge profits from billions in assets covered by the Volcker rule, and Morgan Stanley also has large private equity investments. Banks will be able to invest a maximum of 3% of their capital in these assets when the rule goes into effect in the middle of 2015, so they will either need to sell the assets or take them off-balance sheet with special-purpose vehicles, which would still involve selling significant chunks of the business to outsider investors.

Even with the Volcker rule deadline looming, there’s clearly a business case for holding onto some lines of business for as long as possible.

“If you’re the last one to leave, you get the benefits of your investment longer,” Donald Lamson, a Shearman & Sterling partner who represents large banks, told Quartz. “There’s little incentive to leave too early.”

And of course, there’s always a chance that rules could change and beneficial loopholes to the Volcker rule open up. Already, some lawmakers appear amenable to changes that would exempt smaller banks from selling—and taking losses on—complex debt instruments. Who knows how another year of massaging by Wall Street lobbyists could change the rule?

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