“This is the real stuff,” said Brad Hintz, an analyst at Sanford C. Bernstein & Company. “It shows that if you squeeze Wall Street, like a balloon it will come out somewhere else, and we really are squeezing Wall Street. Their business models are changing.”
The changes are aimed at complying with rules intended to reduce risk and speculation.
Perhaps nowhere is this shift more profound that at Goldman, whose powerful proprietary trading operation is legendary on Wall Street. In the 1980s, under Robert E. Rubin, its arbitragers profitably navigated an era of heady mergers. Today, the group is walled off from other traders on Goldman’s trading floor.
The loss of the division would be a big change for Goldman. The group has long been one of the most sought-after places to work at Goldman, and one of the most highly compensated.
One option under consideration would be to fold the group into Goldman’s asset management unit, allowing it to bring in outside investors. This way, Goldman would gradually reduce its direct financial stake in the unit.
Another option would be to shut the group or let its traders spin it off into a separate fund or funds and seek capital from outside investors.
A Goldman spokesman, Lucas van Praag, said: “We are reviewing our options and will, of course, comply with the new legislation.”
In recent years, the group had as much as $10 billion of Goldman’s capital and focused mostly on stocks. It has also produced several prominent hedge fund managers, among them Edward S. Lampert, Thomas F. Steyer and Daniel S. Och.
At Morgan Stanley, executives have decided to spin off FrontPoint to the fund’s management, according to two people with knowledge of the matter. FrontPoint’s principals were negotiating terms, and the deal could still founder.
Under a tentative plan, Morgan would reduce its ownership of FrontPoint, which employs about 180 people, to about 25 percent. That stake could then be reduced further over the next five years.
Morgan Stanley executives view the restructuring not as a reaction to the financial overhaul but as part of the bank’s recovery since the financial crisis, and as part of the reorganization of its asset management business that was set in motion by the new chief executive, James P. Gorman. The move would represent something of a break with the era of John J. Mack, Morgan Stanley’s chairman, who pushed the bank into areas like hedge funds. But even if Morgan Stanley spins off FrontPoint, it will still own minority stakes in several other hedge funds.