UPDATE 4-Goldman shutters two proprietary trading desks

Tue Mar 1, 2011 5:36pm EST

* Goldman closed one desk in 2010, closing another now

* Cites Dodd-Frank financial reform law

* Estimates legal losses could reach $3.4 billion

* Shares down 1.25 percent in midday trading (Updates to add BreakingViews link)

By Maria Aspan

NEW YORK, March 1 (Reuters) - Goldman Sachs Group Inc (GS.N) said it is winding down two businesses that trade the bank's own money to comply with new U.S. financial reform laws.

The statement from the bank, featured in its annual report filed with regulators on Tuesday, is its most direct acknowledgment so far that it is shutting down units whose sole purpose is so-called proprietary trading to comply with the Dodd-Frank financial reform law signed in July.

The bank also estimated that legal losses from outstanding litigation could be as much as $3.4 billion.

In 2010, Goldman Sachs liquidated most of the positions held by the principal strategies proprietary trading desk in its equities unit, the filing said.

In the current quarter, it started closing the global macro proprietary trading desk in its fixed-income unit.

The bank said in the filing that it took these actions "in light of the Dodd-Frank Act." A Goldman spokesman declined further comment. See BreakingViews column: [ID:nN01147878]

The Dodd-Frank act includes a provision known as the Volcker rule that limits the extent to which banks can make bets with their own money.

Regulators still must clarify some portions of the Volcker rule to distinguish between "proprietary trading," or making bets on markets with a firm's own money, and "principal trading," where firms buy and sell securities that they expect customers to look to sell or buy.

Principal trading will be allowed under the new regulations, but some industry observers have noted that principal trading can involve as much risk-taking as proprietary trading.

Other major U.S. banks have also been liquidating their private equity and proprietary trading holdings in light of the Volcker rule.

On Tuesday, Goldman rival Morgan Stanley (MS.N) completed its split from $4.5 billion hedge fund FrontPoint Partners, which it acquired four years ago. [ID:nN01105239]

But Goldman has not entirely eliminated some businesses that make bets with its own capital. Its investing and lending business -- in which the company lends to clients and buys public and private securities -- comprised 19 percent of its 2010 net revenue, and nearly a third of its pre-tax earnings.

The unit generated $7.54 billion in net revenue and $4.18 billion in pre-tax earnings for 2010.

LITIGATION

Also in the filing, Goldman estimated its potential "reasonably possible losses" from outstanding litigation could run as high as $3.4 billion.

The estimate was lower than JPMorgan Chase & Co's (JPM.N) estimate for its potential legal losses, but higher than rivals like Bank of America Corp (BAC.N).

Goldman has been at the center of regulatory controversy over the last year, including settling with the SEC for $550 million -- the largest settlement ever -- over allegations the investment bank failed to properly disclose to investors how some mortgage backed securities were created.

Goldman also said it recently resumed some foreclosure and eviction activities in its mortgage servicing unit.

Goldman shares were down 1.25 percent to $161.74 in midday trading on the New York Stock Exchange. (Reporting by Maria Aspan; Additional reporting by Joe Rauch in Charlotte, North Carolina; Editing by Lisa Von Ahn and John Wallace)

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