Goldman Using Exceptions in Real Estate Investment Rule

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A new rule prohibits U.S. banks from owning more than three percent of a hedge fund or private-equity portfolio, but some are finding ways to get around it, according to The Wall Street Journal. 

Goldman Sachs Group told would-be investors it planned to contribute up to 20 percent in a new fund to make loans backed by office buildings, hotels and shopping centers, among other properties, the WSJ reports.  

Goldman has raised more than $1 billion for the new fund, and plans to increase it to $2 billion. It is also investing directly into property. In a partnership last year, it purchased and upgraded a Chicago office building.  

The investments are possible because regulators excluded many real estate loans from the restrictions on investment funds mandated by the Volcker rule, WSJ reports. 

"There's no way you're going to write enough rules to outlaw every conceivable type of risky investment a bank might make," Michael Mayo, an analyst with CLSA Americas, told WSJ. "There's a balance between making sure banks don't blow themselves up and allowing them to take enough risks to help facilitate economic growth."

The Volcker rule was a key piece in the 2010 Dodd-Frank financial overhaul legislation. It was approved earlier this month, capping bank's ownerships of hedge funds and similar investments to three percent, among other restrictions.  

But the rule has exceptions, allowing Goldman to make its investments.  

The first real estate fund averaged $121 million, which is "in excess of competitors and provides a competitive advantage," the firm said.  

For Goldman's direct real-estate investments, it held its direct debt and stock investments for a time long enough to avoid the label of "proprietary trading," an activity limited by the Volcker rule, the WSJ reports.