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May. 19 2010 - 11:34 am | 270 views | 0 recommendations | 9 comments

Hey, Goldman — trading on insider info is illegal, remember?

Goldman Sachs Group, Inc.

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Okay, granted, there’s no zealot like a convert.  And since I only recently went from insisting that Goldman Sachs was simply amoral to conceding that it probably crossed the criminal line, I’m now finding signs of that behind every bush.

But still…

There’s a lengthy and riveting piece in today’s New York Times, delineating what Goldman has and has not done, and explaining why, even though it probably has stayed on the right side of the law, it has not stayed on the right side of its clients.

While no one has accused Goldman of anything illegal involving WaMu, National City, A.I.G. or the other clients it bet against, potential conflicts inherent in Wall Street’s business model are at the core of many of the investigations that state and federal authorities are conducting. Transactions entered into as the mortgage market fizzled may turn out to have been perfectly legal. Nevertheless, they have raised concerns among investors and analysts about the extent to which a variety of Wall Street firms put their own interests ahead of their clients’.

via Clients Worried About Goldman’s Many Hats – NYTimes.com.

I’ll get back to the client issue in a bit.  But first, I want to question the legality here.  it seems to me that, by definition, Goldman knows what’s doing with its clients.  It knows whether WaMu (which, you will recall, was one of the first bank failures) holds too many mortgages in danger of going sour, it knows whether AIG is on the hook for too many CDOs and such, etc., etc.  It sure knows a lot more about those companies than any of us do.

So, someone explain to me why Goldman is not trading on insider information when it bets either with or against those clients’ stocks or bonds or esoteric financial instruments?  I genuinely believe that the Justice Department could, if it wanted to, file criminal charges against Goldman and a lot of its competitors.  Or, at the least, it should threaten to do so, unless the companies stopped opposing laws that would stop them from trading for their own accounts.  Washington, are you listening?

But back to client conflicts…

The Time piece chronicles how, since Blankfein and his trading cronies took over, the firm has moved from conflict avoidance to conflict management, and has begun to view its own clients as competitors to trade against, rather than clients to protect. Goldman, of course, has always talked about how “sophisticated” its clients are, suggesting that they don’t need protection at all. That, of course, is bulldoody — sophisticated investors know who to rely on for advice, and Goldman has always been high on the list.  Clients who were jittery about the auction-rate securities market in 2008 asked Goldman’s advice — and were told to stay the course.  You can guess what’s coming next: Goldman itself exited the market, saving a bundle as its clients’ investments tanked.

But comeuppance may finally be in the cards.  Many of those  clients aren’t as boneheaded as I thought, and in fact really do feel uncomfortable with Goldman’s conflicts of interest. Listen to  Kerry Killinger, a former CEO of WaMu:

Mr. Killinger noted that he had avoided retaining Goldman’s investment bankers in the fall of 2007 because he was concerned about how the firm would use knowledge it gleaned from that relationship. He pointed out that Goldman was “shorting mortgages big time” even while it had been advising Countrywide, a major mortgage lender.

“I don’t trust Goldy on this,” he wrote. “They are smart, but this is swimming with the sharks.”

And here’s C. Talbot Heppenstall Jr., treasurer at the University of Pittsburgh Medical Center, one of the clients who followed Goldman’s advice on auction rate securities, then was abandoned by the firm.

Goldman had been U.P.M.C.’s investment banker for about six years, Mr. Heppenstall noted in an interview, but this incident marked the end of that relationship. He said that the other Wall Street firms that had underwritten U.P.M.C.’s auction-rate securities, Morgan Stanley and UBS, had allowed it to redeem them. Goldman was the only firm that did not.

“This conflict was the last straw in our relationship with Goldman Sachs and we no longer do any business with them,” he said.

Now out of fairness, I’ve got to say that I can’t automatically agree with all the conflict complaints lodged against Goldman. A New Jersey state assemblyman, Gary S. Schaer, has complained bitterly that Goldman had collected ample fees for helping the state — which at the time was governed by Jon Corzine, a Goldman alum — issue debt, then encouraging other clients to bet against the debt.  Goldman’s response is that there are “impermeable barriers” between the units that help clients issue debt and the units that advise others to short it.  Schaer, of course, doesn’t buy it:

“New Jersey taxpayers cannot be expected to pay tens of millions of dollars in investment banking fees while another department of the very same firm — albeit one clearly and strategically walled off — actively or aggressively advocates the sale of the very same or similar bonds in the aftermath,” Mr. Schaer wrote.

I want so badly to come down firmly on Schaer’s side.  But…

Goldman is making the same argument that the New York Times makes when it insists that advertising and news are separated by a Chinese wall, and that the amount of money an advertiser spends will never affect the caliber of coverage.  Many people don’t believe that; I worked at the paper for nearly 25 years and I’m telling you, it’s 100% true.  So, if the Times can wall off conflicts, maybe Goldman can as well.  (yeah, i doubt that too — but fair is fair…)


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  1. collapse expand

    …Nevertheless, they have raised concerns among investors and analysts about the extent to which a variety of Wall Street firms put their own interests ahead of their clients…
    This is the crux of the problem. What corporations do not put their own interests ahead of their “customers”? This is why the law must come to bear on industry to assure that the national good comes first. Corporations left untended rise up against the people like machines in a sci-fi future thriller. The hell on earth is that the future arrived. The machines became self-aware and smart enough to buy Congress. Where’s Sarah Connor and her son John when we need them?

    • collapse expand

      I think you’re going too far when you ask for laws that force corporations to put national good ahead of self-interest. That’s socialism, pure and simple — a worthy system, but not OUR system. I’ll settle for laws that say companies cannot secretly pit their interests against those of their clients — they can do so only when they make it crystal clear that they are betting that the client will lose money in the deal.

      In response to another comment. See in context »
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    About Me

    I graduated from Cornell with a degree in child psychology, enough years ago so that all you needed to break into journalism was willingness to starve. I went into business journalism because, in the 60s, the business press was the crusading press, the ones that wrote about environment, race relations, etc. Since then I have worked for Business Week, Chemical Week and, from 1984 through May 2008, BizDay at the New York Times. I remain bored by and ignorant of esoteric financial instruments; I remain fascinated and pretty knowledgeable about management, marketing, environment, all the non-financial aspects of business. But my true passions? Tennis, both playing and watching, and food, both cooking and eating.

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