US banks got a reprieve last week when the Federal Reserve gave them one more year to comply with a Volcker Rule ban on investing in private equity and hedge funds.
For Goldman Sachs Group Inc. and Morgan Stanley, now comes the hard part: Exiting billions of dollars of holdings in a short time without selling some at a loss, Bloomberg reported.
The industry has until July 21, 2017, to sever most ties with private funds after the Fed signed off on the last of three 12-month extensions it was permitted to grant under the Dodd-Frank Act. That means the clock is winding down for Goldman Sachs to shed as much as $7.2 billion of investments and for Morgan Stanley to unload as much as $3.4 billion. Regulatory filings for other big banks don’t provide as much detail on investments they might have to exit to satisfy Volcker.
“For the most part, there isn’t a sense of panic,” said Kevin Petrasic, who runs the financial-services practice at White & Case and has been advising banks on complying with the prohibition on private funds. “There’s more sort of a sense of inevitability.”
Volcker—one of the toughest restrictions in Dodd-Frank—aimed to rein in excessive risk taking after the 2008 financial crisis, partly due to concerns that it wasn’t appropriate for banks with government-backed deposits to make speculative market bets. In addition to banning lenders from trading with their own capital, it restricted investments in funds.
Goldman Sachs has $5 billion in private equity, $1.2 billion in real estate funds and a remaining billion split between hedge funds and credit funds, according to a May filing. Two years ago, the bank had $14.2 billion of fund holdings. It has cut that in half, and the New York-based firm said it expects to be able to exit the majority of what’s left without much difficulty before the deadline.
Tough Sell
But the bank said it can’t pull its money from certain investments, including some private equity and real estate funds, until the underlying assets are sold. So adhering to Volcker may force Goldman Sachs to sell its stakes to other investors, a process the bank said could trigger losses.
“There could be a limited secondary market for these investments and the firm may be unable to sell in orderly transactions,” the bank said in the filing.
Morgan Stanley’s investment stockpile includes $1.8 billion in private equity, according to a May filing, along with $346 million in hedge funds and $1.3 billion in real estate funds.
Many of the real estate funds Goldman Sachs and Morgan Stanley invest in may not be prohibited by Volcker depending on how they’re legally set up, but the banks didn’t provide details on how much of their holdings they think they can hold on to.
Spokesmen for Goldman Sachs and Morgan Stanley declined to comment on their Volcker compliance, as did spokesmen for other big banks, including Citigroup Inc., JPMorgan Chase & Co., Bank of America Corp. and Deutsche Bank AG.
