The long exile of "trading" from the earnings reports of Goldman Sachs has come to a quiet end.
Although traders at the firm make billions trading bonds, derivatives, currencies and stocks, the firm hasn't mentioned "trading," "traders," or "trades" in its earnings reports since 2010. Beginning in the first quarter of 2011, trading became "client services" or "client execution." Trading was banished from the vocabulary of Goldman's earnings.
The banishing of the word trading came after the introduction of the Volcker Rule and an internal study of the firm's business practices (which was launched after the SEC accused Goldman of fraud). It abolished the part of its business called "Trading and Principal Investment"—which once housed both client and proprietary trading. In its place it put two two divisions: "Institutional Client Services" and "Investing and Lending."
Now, of course, Goldman still trades. But it says it no longer engages in prop trading. It's trading is now focused on market-making, which means much more than buying and selling securities after receiving orders from customers. Goldman does not, actually, sit around and wait for customer orders. It actively creates positions—buys stuff—that it seeks to sell to clients. It takes trading risk but doesn't call it trading anymore.
So how did this 8-quarter-long ban on trading collapse? It appears we have Warren Buffett to thank. In its earnings release, Goldman described an amendment to its warrant agreement with Berkshire Hathaway.
Here's the language (emphasis added):
On March 25, 2013, the firm amended its warrant agreement with Berkshire Hathaway to require net share settlement and to specify the exercise date as October 1, 2013. Under the amended agreement, the firm will deliver to Berkshire Hathaway the number of shares of common stock equal in value to the difference between the average closing price of the firm's common stock over the 10 trading days preceding October 1, 2013 and the exercise price of $115 multiplied by the number of shares of common stock (43.5 million) covered by the warrant.
Sure. Goldman still doesn't want to describe itself as trading. But the word itself has made a comeback. Goldman is admitting that trading still exists. Could the admission that trading still goes on at the house of Blankfein be far behind?
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