Goldman Sachs Stock Price Can't Escape Volcker Rule Time Bomb

goldman sachs stock priceGoldman Sachs stock price movements were muted yesterday (Thursday) on what was a wildly successful earnings season for the investment banking giant.

Goldman Sachs Group Inc. (NYSE: GS) earnings crushed estimates across the board. Goldman posted $10.6 billion in revenue against expectations of $9.3 billion. Earnings-per-share (EPS) came in at $6 on estimates of $4.26. Income came in at $2.8 billion on estimates of $2 billion.

Goldman Sachs earnings didn't just beat estimates - they were their best in years. Sales were at their highest since 2011. Income was at its highest since 2010. And EPS was its highest since 2009.

But traders on the day weren't impressed. The Goldman Sachs stock price fell Thursday to $200.21, a 0.4% drop.

The market's instincts are correct on this one. There is no reason to pile into GS stock right now.

Big bank stocks are not the best place to put your money.

And Goldman Sachs has its own challenges ahead...

Regulatory Gray Areas Will Threaten Goldman Sachs Stock Price

GS stock, like many big bank stocks, doesn't provide much long-term, buy-and-hold value - at least not at this time.

Your best bet on a stock like this is to wait for some sort of banking panic, like in 2008. The collapse of Lehman Brothers and the ensuing financial crisis sent the Goldman Sachs stock price down to $52 by November 2008.

Investors who bought when there was blood in the streets and held until now would have pocketed close to 300% gains.

But the Goldman Sachs stock price has all but hit its ceiling. There isn't another 300% gain on the horizon for GS stock.

If anything, GS stock has even more uncertainty to contend with moving forward, primarily on the regulatory front.

If there's anything the financial collapse taught us, it's that Congress has no shortage of knee-jerk, short-sighted Band-Aids it will attempt to pass under the banner of "Wall Street reform."

Just look at the hastily arranged Dodd-Frank Act...

This is a law that all but codified the "too big to fail" doctrine. Through Title II, it put bankruptcy proceedings for large banks in the hands of the Federal Deposit Insurance Corp., which has the power to liquidate a big bank by fiat - unaccountable to the company's creditors.

The regulatory environment is still an unknown. The Big Banks and their lobbyists have had a hand in helping craft banking legislation that is broadly written and loosely implemented. There's no shortage of loopholes Goldman can exploit. And it will just take one big loss on Goldman's books - perhaps one as big as the London Whale trade that lost $6.2 billion for JPMorgan Chase & Co. (NYSE: JPM) in 2012 on risky trading - to put the investment banking giant firmly in the crosshairs of regulators again.

One particularly glaring loophole comes from Dodd-Frank's Volcker Rule provisions. Named for former U.S. Federal Reserve Chairman Paul Volcker, this part of the law curtails investment banks' abilities to execute risky trades that could incur big losses.

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It prohibits Goldman from proprietary trades - using their own money to make trades. But Goldman, as an investment bank, will still execute agency trades, meaning it will bring its clients' position to market to find another side of that particular trade.

"They get around a lot of the proprietary trading stuff that they're not supposed to be doing by simply saying, 'I'm not doing it. But I do have the right under Dodd-Frank to make markets and in the process of making markets - if it's client-related - I can take a position," Money Morning Capital Wave Strategist Shah Gilani said. "So this is a very gray area."

This is how it works: A client will ask Goldman to execute an agency trade for them - that is, find a counterparty to a position they want to take. Goldman will take the position as they bring it to market.

But when they sit on the position, they are able to take any gains it will make before they find an investor to take the other side of the trade.

"They're basically taking the position from you, but in the meantime they're holding that position. They're at risk. That's a trading position," Gilani said. "They'll simply say, 'Okay, I'm acting as an agent here, so I'm going to go get what you want, I'm not going to trade, I'm going facilitate the trade because I've got better client relationships that you don't know.'"

This could prove to be a dangerous game for Goldman, and in the future could hit the Goldman Sachs stock price.

"It's just a matter of time before something bad happens and regulators realize, 'Well, we let this go on too far and we've got to do something about it,'" Gilani said. "The regulations are gray, and part of them I think were made that way on purpose because regulations are often made by the banks. They send in their lobbyists to help make the legislation in their interest."

This kind of trading activity could be stopped if a line is drawn in the sand, but Gilani said, "There is no line, there's just a wide moat, and if they're in that moat you can't fault them."

The Bottom Line: It's not that Goldman Sachs is a poorly run company that makes them a stock to avoid. "As far as being a well-managed company, they're the best. Period," Gilani said. Earnings were exceptional. But the Goldman Sachs stock price doesn't have much room to run after its 300%, six-and-a-half-year bull run following the financial crisis. And the ambiguity of federal banking regulation always leaves an opening for regulators and Congressional leaders looking to "talk tough" to Wall Street to forge ahead on heavy-handed trading laws. This kind of action will come down on future Goldman Sachs' earnings, and ultimately the Goldman Sachs stock price.

It's Not Just Goldman Sachs...All the big investment and commercial banks are stocks to avoid. The burden of regulatory compliance and paradigm shifts in the banking business make it much harder for financial institutions to replicate the big gains they've made since the depths of the financial crisis. Here's another big bank stock to avoid...