LONDON, Jan 21 (Reuters) - After all of the hoo-hah about the release of Goldman Sachs’s Business Standards Committee report, what can we really glean from it about how the firm’s internal thinking is changing?
And to what extent can we extrapolate from it and get a sense of how the industry’s internal thinking is evolving around the subject of what constitutes good client service and client conflict?
In truth, the answer to both questions is ‘not much’. Goldman’s report was a triumph of form over content, 63 pages of turgid prose that came much closer to inducing somnolence than exhilaration. In fairness, it ticked a lot of the right boxes insofar as it acknowledged a lot of the issues that everyone has been so vocal about over the past two and a half years.
If you want a one-line summary of the GS report that captures its essence, mercifully (for those who haven’t got around to reading it yet) it’s in the executive summary on page 2: “... our approach must be: not just “can we” undertake a given business activity, but “should we”.
That gets to the heart of the debate and the criticism that’s been leveled at Goldman and the investment banking industry. It’s an interesting addition to the business selection process. Over and above regulatory absolutes, it adds an overlay of moral integrity.
But while that sounds good, it doesn’t really help define the specifics of what the industry will do and won’t do - or should or shouldn’t do.
As well as applying a moral judgment to business selection, Goldman now proposes to apply an appropriateness test on its clients before agreeing to sell them structured products. Again, that sounds good, but what metrics will it impose on customers?
How does it propose to tell a client that it won’t sell them something they want because they’re not sophisticated enough to understand it? That’s a difficult call to make.
Would these new standards have caused Goldman to turn down the infamous Abacus CDO trade it did with Paulson and ACA et al? One can only assume that it would, but I’m not so sure. ACA would without doubt have considered itself a sophisticated client with a deep knowledge of CDOs, so caveat emptor would have been applied.
What’s at play around this whole issue is whether the roles of market-maker as liquidity provider versus investment adviser as fiduciary are compatible, what exemptions might apply, whether regulators should force a separation of that kind of duality, whether there should be an obligation on a broker-dealer to signpost which role it’s playing when, and whether it should be required to publicize its trading position.
This is where it gets complicated, not least because Goldman and others in the industry have not only created profitable and efficient divisional businesses in advisory, financing, principal finance and trading; they have worked and leveraged the intersections and crossovers of each of those divisions to the point where figuring out where one ends and the other begins can be difficult.
For example, Goldman has given into pressure over how much money it makes from proprietary trading and principal finance by adding a fourth ‘Investing and Lending’ reporting segment, but it’s not clear in the annual results how the firm differentiates between trading for its own account, and using its own capital to trade for the purpose of client facilitation.
While at the margin it’s relatively easy to define what each individual business, is supposed to do, there are so many instances in today’s connected world those differences melt away. The question it leaves is: can the Street function profitably if rule makers impose a more formal separation of activities? And what will a reduction in efficiency mean for the fee and commissions structure?
If moral judgments are now going to play a more important role in defining business development and on the basis that in absolute terms, a firm’s morals are defined by the combined code of its leadership team, could moral arbitrage become the new industry in-thing? You heard it here first.
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