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Regulation and Compliance > Federal Regulation > SEC

Goldman Sachs

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Not the first time we’ve seen Goldman in the news, is it? Now the old Wall Street firm (1869) is being attacked by the SEC for being on both sides of trading activity. Here’s my question: What is Goldman exactly?

If Goldman is a brokerage firm, it’s bound to handle trades from both sides — customers who are buying and customers who are selling. Goldman could take an order from one customer to buy a security while it is selling the same security for another customer.

While I agree that I’m a long, l-o-n-g way from being a trader (financial planners trade, buying and selling stocks and funds, but usually not on a daily basis), big financial investment banks often have a substantial trading “desks,” where customers may buy and sell shares. Thus, it seems plausible that Goldman — which deals with moneyed individual and institutional customers — could take orders from customers who bet both ways on subprime mortgages. And Goldman itself could bet either way separately. Indeed, one part of Goldman could bet one way and another division could bet another. Many often bet two ways, including institutional investors, in order to hedge against risk.

According to the April 19 issue of Barron’s, this was a private transaction among “Buyers — and losers — (who) were sophisticated institutional investors and financial companies.”

So, I think it’s about disclosure. The disclosure for my monthly column, “The Investment Edge,” (April’s column: “Feel the fever: Retirement Savings Planner“) says that I may take positions in the investments I discuss:

This information is intended for financial professionals only, not the general public. This is not a solicitation to buy or sell any specific security. Mr. Hoe may have positions in the securities or other investments discussed. Evaluation copies of software and review copies of books are sometimes furnished by publishers without charge; however, Mr. Hoe only reviews books and programs he feels will of value to LIS readers and avoids writing about books and programs he feels would be of little interest.

Where the disclosure says “take positions,” I could either be long (betting on or owning) or short (betting against) stocks. The truth is that I have never shorted any stock held by customers; after all, I pretty much invest the same way as my customers (and in the same things), except that I sometimes try investments out in a small account before I recommend them. Aside from the disclosure, which applies to my monthly column, as a registered rep, I am not permitted to engage in front-running (using knowledge of customer trades to improve my own account) or pump-and-dump (recommend a stock to the extent that the price increases, and then sell my own stock at a profit).

Goldman has many divisions, including wealth management for individuals. I’ve been in this business long enough to know that it is possible to have a customer who adopts one strategy that is separate from a firm’s strategy or general recommendation, and, indeed, much different than the strategy of a different customer. I would even guess that it would be easy for one division of Goldman to have a different view from another. This should be an interesting case, since it is always possible that an investor or institution executed its own strategy with Goldman, with or without Goldman advice. Presumably, the SEC has examined all the disclosures in the case, right?

Whatever the outcome, it’s interesting from the standpoint of the word brokerage. Since brokerages exist to make a market for buyers and sellers, they function as intermediaries for both. I guess it will depend on how the courts view Goldman and its disclosures. It’s confusing — Goldman has a lot of moving parts. I keep wondering if the SEC, (which Harry Markopolis, when he tried time and again to blow the whistle on Bernie Madoff, famously suggested had no folks with degrees in finance), ever recruited any.

Have a sensational week! Spring has sprung in Oklahoma and should be coming soon to a region near you.

Check out more blog entries from Richard Hoe.


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