Goldman, Morgan Stanley Will Liquidate Huge Alts. Portfolios

Aug 10 2010 | 1:14pm ET

U.S. banks have been scrambling to decide what to about their proprietary trading operations, which are barred under new financial services regulations. But those new rules also strictly limit how much banks can invest in alternative investments vehicles, and that could prove an even bigger headache for the biggest banks.

Two of them, Goldman Sachs and Morgan Stanley, have almost $20 billion combined invested in private equity, hedge funds, private debt and real-estate, they said in regulatory filings yesterday. They’ll have to cut those exposures by more than 60% over the next decade to come into compliance with the recently-passed Volcker rule, which bar bank holding companies from investing more than 3% of their Tier 1 capital in such funds.

Goldman had $15.4 billion in the newly-restricted investments as of June 30. The firm said it plans to liquidate “substantially all” of those funds within 10 years. The Wall Street giant has $7.32 billion invested in private equity, $3.02 billion in hedge funds, $4.18 billion in private debt funds and $910 million in real-estate funds. It’s Tier 1 capital was $68.5 billion, meaning that restricted investments will have to fall to about $2 billion.

Morgan Stanley, which had a more modest $4.22 billion in alternative investments, said it will liquidate 46% of its $1.59 billion in p.e. investments and 49% of its $887 million in real-estate funds over the same period. The firm also had $1.75 billion invested in hedge funds.

Morgan Stanley’s Tier 1 capital was $53.5 billion, which means it will have to cut its stakes to about $1.6 billion.

Both have already begun to reduce their hedge fund and private equity holdings. Goldman’s stakes have fallen by $500 million since the beginning of the year, while Morgan Stanley has reduced its holdings by $720 million.


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