Uncertainty hangs over the prop desk

GOLDMAN beat expectations yesterday, but its shares dropped and were down by more than two per cent by lunchtime in New York.

But it wasn’t just because traders were feeling uncharitable. The bank only beat analysts based on what many see as unreliable profits from its propriety investing and lending division, the part of the bank responsible for investing its own cash.

The notorious prop trading desk accounted for 23 per cent of the bank’s $11.9bn revenues in the first-quarter of this year and improved its performance on both early 2010 and the last quarter of the year.

But investors are wary of prop investment gains. Referring to the division, the bank said: “These results generally reflected an increase in global equity prices and favourable credit markets during the quarter.”

The limited breakdown available shows that about a billion of the revenues comes from equities, another billion from debt and a further $316m from one single investment in the Industrial and Commercial Bank of China.

The question is not just whether this revenue stream will deliver consistency, but how much of it will be allowed to continue under a new regulatory regime.

While the bank has jettisoned all activity that has so far been outlawed by the introduction of the Volcker rule, which limits the amount of trading a bank can do with its own capital, the specifics of the new law have yet to be written.

That means that an unknown chunk of the bank’s best-performing division is yet to be axed – not a comforting thought for shareholders.