The fair dealing (suitability) standard withstood a full day of scrutiny under Congressional headlights. The incredulity of some subcommittee members seems to reflect a “Rand Report effect;” that is, there is an assumption, it seems, that the Fiduciary Standard does exist for brokers. An assumption that Goldman Sachs would not aggressively pursue its own best interests consistent with fair dealing practices and legal requirements.
Several Senators honed in on the fundamental contradiction between Goldman’s stated commitment to client’s interests’ and the firm’s ‘shorts,’ or “betting against” its own clients (as Senator Levin put it.) Senator Collins was most pointed in exploring whether execs accepted a fiduciary duty. The Goldman execs’ testimony on April 27 affirmed Lloyd Blankfein’s clear and unequivocal statement last January where he stated there was no fiduciary duty in the marketmaking role. Further, the “client best interest” standard, according to Goldman Sachs execs, seems to mean only what Goldman says it means. It means to, for example, “serve” clients, or to “create products that clients want to buy,” among other things. “Client best interests” explicitly does not mean disclosing “adverse interests” except as it regards holdings or investments, or it does not mean offering the firm’s “opinions.” As Blankfein further explained, “They don’t, or shouldn’t, care about our views.”
Execs staunchly defend not disclosing firm’s positions to counterparties; one exec notes non-disclosure is “consistent” with industry standards.
Senator Levin. Senator Levin seems determined to bring back memories of an earlier age and recreate the gusto of Ferdinand J. Pecora. Pecora dramatically led the 1930s Senate investigation into the causes of the Great Depression, whose media coverage of the hearings is credited by many historians as creating the public support for the Wall Street reforms, then. Quoting the 1934 Senate conclusion, “The results of the unregulated activities of the investment bankers…were disastrous,” Levin noted, “The parallels today are unmistakable.” Later, after hearing from six panelists, Levin concluded that though Goldman Sachs claims to always put clients’ interests first, “You don’t; you (often) put your own interest first.”
Senator Collins. Senator Collins zeroed in on the fiduciary standard, and asked each of the first four Goldman witnesses–Daniel Sparks, Josh Birnbaum, Michael Swenson, and Fabrice Tourre–whether they had a “Duty to act in the best interest of your clients?” Sparks, Swenson, and Tourre replied their duty was to “serve our clients;” Birnbaum, alone replied, “I believe that we did.”
Senator Pryor. Senator Pryor followed up on a question first asked by Senator Levin: whether Goldman had an obligation to disclose “adverse interests.” Sparks responded very carefully that no disclosure is required regarding its positions, but “we owe them all the information regarding the instrument.” Additionally, Sparks stated, “people should focus on the assets and how the deal works,” as opposed to Goldman Sachs’ positions. When also asked whether Goldman should be obliged, by new regulations, to disclose positions, Sparks replied that doing so would be “very difficult.”