A recent article for Fortune magazine’s “Street Sweep” cites three examples of how Citigroup (C) is liberally interpreting the new Volcker rule.
- Selling a $3.5 billion real-estate fund to Apollo Management and a $4.2 billion fund of hedge funds to SkyBridge Capital, and it let its star commodities trader, Andrew Hall, go free to pursue his own business. But Citigroup had already committed to divesting some of those businesses, and in the case of Hall, the bank preferred to let him start his own venture — and accept some of the profits from the new business — rather than conform to potential government pay limits on his $100 million compensation.
- Casting around for $3 billion more to invest in private equity and hedge funds including “special opportunities” — read, riskier, distressed assets — in real estate and emerging markets. It also renamed its largely money-losing Citi Alternative Investments unit as the vaguer “Citi Capital Advisors.”
- Selling a $900 million-plus private equity portfolio to secondary investments firm Lexington Partners. But that doesn’t mean that Citigroup is stepping away from PE; in fact, the portfolio of old Citigroup Private Equity investments was a “zombie” portfolio after the main investor left earlier this year.
In each case, says ‘Street Smart’, “the result, predictably, has been some fancy footwork in which banks sorta kinda seem to be acknowledging the rule, but in truth are just following self-interest.”
The Volcker Rule named for former Federal Reserve Chairman Paul Volcker, is supposed to prevent banks from holding too much exposure to risky activities like proprietary trading and investing in unpredictable businesses like private equity funds and hedge funds.
According to Citigroup analyst Keith Horowitz, banks have different exposures to these businesses, ranging from Morgan Stanley’s (MS) $6.34 billion of proprietary investments to JP Morgan’s (JPM) $8.88 billion to Goldman Sachs’s (GS) kitty, the biggest, at $29.1 billion.
That makes the 3% capital threshold large enough that most big banks won’t have to curb their proprietary trading much, if at all.
And The Atlantic is reporting that the 3% requirement could make bank balance sheets even riskier by making it more beneficial to trade in-house, instead of bothering to establish private equity groups or hedge funds that would be open to outside investors. That could make the risk less diversified and more concentrated.
And what seems particularly ambivalent about the new Volcker rule is the idea of separating the old-fashioned commercial banking business from the more volatile investment banking business, similar to the Glass-Steagall Act of 1933.
In fact, unlike the Glass-Steagall Act which forced commercial banks to shed their investment-banking unit in less than two years, the new law means some U.S. banks, including Goldman Sachs Group Inc. (GS) and Citigroup Inc. (C), will have until 2019 to fully comply with the new legislation.
The question of how to unwind these funds, and the timeframe they would have to do it, was a key concern of the large banks. That has been taken away.
