The Wall Street firms that do business with SAC Capital are right to be privately worried about possible legal contamination from the criminal indictment against the hedge fund.
Publicly, Wall Street is standing behind SAC Capital. It's "business as usual," according to reports. Gary Cohn of Goldman Sachs recently praised SAC as "a great counter party" in an interview with my colleague Kate Kelly.
But behind the scenes, Wall Street executives are worried, according to people familiar with the matter. All the biggest Wall Street firms have extensive ties to SAC Capital—ties that could put them in legal jeopardy, particularly under much larger exposure spelled out in the Dodd-Frank banking reform regulations..
It would be hard to over-estimate the significance of SAC Capital to Wall Street. The hedge fund employs what has been described as "significant leverage" in its trading strategies, borrowing money so that the firm is able to take trading positions that aggregate to much more than the roughly $15 billion of assets it has under management. The firm lists its regulatory assets as $50 billion in a recent regulatory filing, for example. Much of that leverage comes from loans from Wall Street banks.
Even that understates how much business SAC does through the top Wall Street firms. That $50 billion is a snapshot in time, not a cumulative count of all of the assets that SAC acquires and disposes of throughout the year. No one outside of SAC—and very few inside of SAC—knows the total volume of trading SAC is responsible for across all the markets it trades, but it's a safe bet that the number is in hundreds of billions.
That kind of volume makes handling SAC's trades very big business for its prime brokers. Over the years, SAC Capital has paid billion in fees to its prime brokers, people in the sector estimate. According to a recent regulatory filing, those on the receiving end of SAC's prime brokerage fees include all the big prime brokers—Bank of America's Merrill Lynch, Barclays, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley and UBS. In short, there's SAC money flowing all over Wall Street.
At many of these firms, there are people whose entire careers are built around their relationship with the hedge fund. They work for SAC almost as much as they work for their nominal employers—and certainly their paychecks depend on robust SAC trading.
"These folks may be eating crumbs that fall from the table of SAC—but those crumbs are made of gold," one person at a prime broker used by SAC said (he does not work directly with SAC).
(Read more: SAC trader had been fired in bonus scheme: Report)
So the news that the Justice Department is not seeking to freeze SAC's assets is welcome on Wall Street. The fees also explain why Goldman's Gary Cohn uses the phrase "great counter-party" to describe a hedge fund under criminal indictment. If the Justice Department's investigation were to somehow put a halt to "business as usual," the big Wall Street firms would lose hundreds of millions of dollars in revenue.
But the loss of revenue may not be the worst of it. Wall Street may face an even greater—if less probable—danger if SAC were to be convicted of criminal charges. Some prime brokers and their employees could find themselves targeted by regulators for "aiding and abetting" the alleged securities law violations of SAC.