Morning Coffee: Goldman’s hedge fund purge, where one bank now employs over 24,000 people
Prime brokerage may not be the most exciting area of investment banks’ business, but it’s one that has proved to be steadily profitable, bringing in $13bn last year, as revenues tumbled in more traditional trading function. It’s therefore not entirely reassuring for those employed in these functions when Goldman Sachs decides to pull back from the business because of the ripple effect of the Volcker rule.
Not only are banks cutting back prop trading, retreating from commodities and, in some cases, exiting entire business areas within their FICC divisions, now Goldman is looking more closely at the hedge funds it deals with in order to set aside more capital.
Goldman is getting rid of less-profitable clients and telling others that it needs to charge bigger fees in order to justify holding the capital on its accounts. At the same time, Goldman is pulling cash out of its internal hedge fund, possibly a primer for following other investment banks and hiving off the business into an external entity.
In case you’re in any doubt as to the impact of these changes, Robert Sloan of financial analytics firm S3 Partners has this to say: "It's the most dramatic thing to ever happen in the business. It's a total redefinition of what's a good customer."
Separately, as we reported yesterday HSBC is being forced to ramp up salaries and bring in ever larger numbers of risk and compliance staff to deal with the shifting regulatory environment. The FT has pointed out just how much of a drain these resources have become – it now has 24,300 people working in risk or compliance, which accounts for 10% of its total headcount and is preventing it from hiring more customer-facing employees. This is up from around a sixth of total employees three years ago.
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