Goldman Looks on the Bright Side of Volcker Rule

Viniar did not provide a target for Goldman's return-on-equity, but in a slide presentation he indicated that if Goldman were to exclude profits and losses from businesses affected by the Volcker rule from 2004 through 2011, the bank would have had the same average quarterly returns with less volatility.

Return-on-equity is a closely watched indicator of how well banks use shareholder money to earn profit. Last year, Goldman reported a paltry ROE of 3.7 percent, far below levels above 30 percent in 2006 and 2007.

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After the financial crisis, Goldman executives forecast a return-on-equity target of 20 percent as the markets and economy became more stable. But they have since backed down from that target without offering a new one, citing uncertainty about how financial reforms will affect profits.

The Volcker rule, named for former Federal Reserve Chairman Paul Volcker, is part of the Dodd-Frank financial reform bill passed in July 2010. It is meant to prevent commercial banks that take deposits from gambling in the markets for their own accounts. The rule, due to go into effect in July, has numerous exceptions but has prompted many U.S. banks to close their proprietary trading desks.

Viniar said on Wednesday that if regulators impose strict trading limits, Goldman would be forced to turn over assets more quickly, and would be more hesitant to buy securities from clients that it could not immediately sell.

While the executive stopped short of saying Goldman would convert to an agency trading model -- which matches buyers and sellers before executing a trade -- he did indicate the bank would start buying securities at lower prices and selling them at higher prices to reflect the risk of taking on trades.

Those wider "bid-ask spreads" would make trading more expensive for clients, but help boost Goldman's returns.

Viniar also said Goldman would exit or reduce business lines that require too much capital to be profitable under new rules. This would allow the bank to put more capital to work earning profit, rather than sitting idle as reserves against risky securities, he said.

"Ultimately, it could lead to lower dealer inventory levels and could be ROE-enhancing as we adapt to a less capital intensive business model," he said.

According to a presentation the CFO gave last year, Goldman holds 32 percent of the securities on its balance sheet for at least three months, and 8 percent for at least a year. On Wednesday, he suggested that less liquid securities will not find a home on Goldman's balance sheet in the future unless the bank can demand higher rent to hold them.

"It's pretty clear the direction Wall Street is going," said Jason Graybill, senior managing director at Carret Asset Management, which invests in U.S. banks. "Pay is coming down, margin is coming down, and they have to make up for returns somehow. When he says ROEs will go up, he means relative to the last two years, not '06 and '07."