Main Street Shouldn't Stand for Goldman's Leftovers
Banks need to separate their proprietary traders from anyone with access to external clients.
Andrew Ross Sorkin of the New York Times' DealBook blog just published a Goldman Sachs (GS) email to clients clarifying potential conflicts with the investment bank's own trading desks.
The notion of an investment bank competing with its own clients is nothing new. Whether it's private equity, hedge funds, or mutual funds, banks have shown a knack for emulating the successful business models of their best customers.
In a nutshell, the email is just a pile of legalese aimed at combating future litigation. Otherwise, it wouldn't include statements such as "it is your responsibility to seek appropriate advice" and "we will not be acting as your advisor." Though I'd love to know -- if your advice is inappropriate and you won't even call yourself my advisor, will you still be charging me commissions?
But in all seriousness, what makes the Goldman email so compelling is that it makes clear that its clients are being served sloppy seconds:
The Fundamental Strategies Group is a group of cross-capital structure desk analysts employed by our Securities Divisions to assist our traders. They develop Trading Ideas in conjunction with traders. We may trade, and may have existing positions, based on Trading Ideas before we have discussed those Trading Ideas with you. We may continue to act on Trading Ideas, and may trade out of any position, based on Trading Ideas, at any time after we have discussed them with you. We will also discuss Trading Ideas with other clients, both before and after we have discussed them with you.
Good trading ideas are fresh -- as in not already discussed and/or acted upon by the trading team at the world's most powerful investment bank.
And whether Goldman itself used those trading ideas or not, it's still a serious conflict of interest. If it's a good trading idea, why would Goldman want to share it? And if Goldman's own traders rejected it, what should it be distributed to clients after the fact?
What's clear is that Goldman, and every other bank for that matter, needs to formally separate its proprietary traders from anyone with access to external clients, if for nothing else but good public relations.
Main Street is a client of Wall Street. Giant money managers (Goldman clients) are closer to the average person than is obvious. They manage the mutual funds in 401(k)s, the dollars in pensions, and the endowments of non-profits. It could be argued that the public is indirectly being served up leftovers by Goldman.
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