Goldman COO defends market-making practices

NEW YORK (Reuters) - Goldman Sachs Group Inc could not function as a market maker if it was a fiduciary, President and Chief Operating Officer Gary Cohn said on Tuesday.

Executives from the bank, which is facing civil fraud charges from the U.S. Securities and Exchange Commission, faced questions two weeks ago from a Senate panel in Washington about Goldman’s role in the subprime mortgage crisis. That panel discussed whether Goldman Sachs was conflicted in selling securities to clients and then shorting those securities.

Cohn, Goldman’s second-in-command, did not testify before the Senate panel, but at the conference on Tuesday in New York he defended Goldman Sachs’ role as a market maker. He said the bank needs to be able to offset risks related to market making, in which it offers prices for sometimes illiquid securities that may not have both buyers and sellers.

Markets would not work if market-makers were fiduciaries, he said.

Goldman shares have tumbled more than 20 percent since the SEC accused the bank on April 16 of failing to tell investors who bought risky debt tied to subprime mortgages that hedge fund manager John Paulson helped select the underlying portfolio for the security and was shorting the deal.

The firm is also being investigated by the Justice Department, according to a source and is facing shareholder lawsuits.

Separately, Cohn said Goldman Sachs is seeing the beginnings of a slow pickup in mergers and acquisitions activity, even as the economic environment remains uncertain.

Markets are likely to remain volatile in the short term as investors digest the significance of the Greek bailout. Expected reform of the U.S. banking system is also contributing to uncertainty, Cohn added.

Goldman Sachs is broadly in favor of efforts to reform the financial system, he said, noting the bank supports plans to increase exchange trading and clearing of derivatives, among other measures being discussed by lawmakers.

The bank is aiming to adapt quickly to regulatory changes, he said.

Goldman said on Monday it continued its trading momentum in the first quarter of 2010, reporting zero days of trading losses, the first time it had an entire quarter with no losing days.

Goldman had 35 days in which its traders posted revenues of more than $100 million in the first quarter.

Reporting by Elinor Comlay and Steve Eder; editing by Andre Grenon