An enterprising piece of investigative reporting by Bloomberg News’s Max Abelson, about a “secret” team inside Goldman Sachs Group Inc. charged with investing $1 billion of the firm’s money, raised eyebrows on Wall Street.

More important, the story raises major questions about whether the so-called Volcker rule -- still being written in Washington’s halls of power -- will put too fine a point on the kinds of risks Wall Street banks are permitted to take.

Former Federal Reserve Chairman Paul Volcker has been trying to solve a real problem: reducing the “heads I win, tails you lose” kind of risk-taking that Wall Street bankers and traders relish and that almost brought down the house in 2007. But that will not be accomplished by his eponymous rule. Not even close.

The only way to properly regulate the collective behavior of bankers, traders and executives is age-old: through their pocketbooks. Unless, and until, they are again held financially accountable for their bad behavior -- as they were during the long era of private partnerships on Wall Street -- there is no hope for meaningful change. The Volcker rule won’t change it. The entire Dodd-Frank financial overhaul won’t change it.

Smart Strategy

With that in mind, what to make of Goldman’s in-house investment team? Despite the public pronouncements of Lloyd Blankfein, the chairman and chief executive officer, that Goldman has “shut off” the firm’s proprietary trading business in anticipation of the Volcker rule, Goldman still has a group run by a bunch of Princeton graduates known as Multi-Strategy Investing. According to Abelson, it “wagers about $1 billion” of shareholders’ money “on the stocks and bonds of companies.”

The unit evolved from another secretive, hedge-fund-like unit inside Goldman known as the Special Situations Group, which was a way for partners to invest their considerable fortunes in all sorts of money-making strategies. For instance, the group invested in Hite Jinro Co., a Korean liquor manufacturer that had been in receivership, and made at least $800 million in profit. Understandably, the firm kept the success of the deal quiet.

But so what if Goldman wants to invest its partners’ or its shareholders’ money in an organized, systematic and clever way? How are the rest of us hurt by that? And why should regulators try to stop Goldman from continuing to do it?

Nobody is forcing a partner at the bank to put money into such investments and, for that matter, nobody is forced to be an investor in Goldman. If you don’t like the kind of business the firm does, then don’t buy Goldman’s stock or bonds.

But, you might think, we need protection from risky behavior and bets by Goldman that can bring down our financial system. That’s the gist of what the Volcker rule was originally drafted to accomplish.

For the record, though, the proprietary bets of a small group of traders inside Goldman, led by Josh Birnbaum, that the mortgage market would run into serious trouble in 2007 earned Goldman about $4 billion in extra profit that year. Rather than putting Goldman at risk during the financial crisis, proprietary trading allowed it to weather the storm far better than any of its competitors.

While the rest of Wall Street was melting down in 2007, Goldman was thriving with a then-record $17 billion in pretax profits. Why, exactly, does Paul Volcker want to stop that sort of investing?

Personal Stake

Shouldn’t Volcker prefer that every firm on Wall Street have the sound risk-taking culture found at Goldman? Rather than spending countless hours and millions of dollars in legal and lobbying fees to try to craft a Volcker rule that the regulators and the regulated can live with, we would be better off junking it altogether.

In its place, though, we should craft an incentive system on Wall Street that rewards people for taking prudent risks and penalizes them directly -- in their own pockets -- when the risk-taking goes wrong.

Wall Street became the envy of the world because once upon a time it struck the right balance between risk and reward. That tradition has been all but lost in the years since 1970, when Donaldson, Lufkin & Jenrette broke the ice and went public. One partnership after another followed suit.

What was lost in the stampede to the public offering was more than just a corporate structure. We squandered a way of doing business that rewarded smart risk-taking -- with big paychecks -- and made sure there was accountability.

After more than a decade of internal debate, Goldman Sachs went public in May 1999, the last large, full-service Wall Street firm to do so. It alone retains vestiges of that old-fashioned partnership culture. Goldman has plenty of flaws -- hubris, arrogance and greed among them -- but failing to understand risk is not one of them.

What should be gleaned from the behavior of Goldman Sachs in the last decade is that a combination of prudent risk-taking and serious accountability is the path forward on Wall Street, not putting our collective faith in some bloated legal document crafted by a roomful of lawyers and lobbyists in the middle of the night.

(William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase. The opinions expressed are his own.)

To contact the writer of this article: William D. Cohan at wdcohan@yahoo.com

To contact the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net