Goldman Sachs Sets Record for $100 Million Trading Days
The news gets to the heart of how Wall Street makes money, and how it does not. "Proprietary trading," when banks trade for their own accounts, can be highly profitable, and it can also be extremely risky. Hedge funds that take extraordinary risks often go out of business if their bets do not work. Goldman, as a bank, has access to funds because it has deposit-taking divisions. The core of the "Volcker rule" which is part of legislation being consider by Congress is that proprietary trading organizations should be separated from retail and commercial bank activity. Volcker, who was the head of the Federal Reserve from 1979 until 1987, believes that the government should not bail out proprietary trading organizations the way it would deposit-taking banks.
It's not clear whether Congress will pass laws that would limit proprietary trading rules at banks. But it's clear that the proceeds from trading can make up most of a bank's profits. That being said, investors in banks that trade on public markets would have more modest results, in some instances, if banks could not trade for their own accounts. On the other hand, banks that place too many losing bets could face tremendous losses.
Goldman's results were extraordinary. If Volcker's plan had been in place last year, it's not clear that Goldman could have posted the same numbers. That means it's not likely the Goldman's shares would be up over 90% in the last year. Volcker's rule can pit shareholder's interests against those of taxpayer's. It is still not clear who will win.