Goldman at last gets a conflicts comeuppance

September 11, 2012

By Reynolds Holding
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Goldman Sachs is at last getting its comeuppance over conflicts of interest. The bank is forfeiting a $20 million fee after playing both sides of Kinder Morgan’s $21 billion El Paso deal. It’s peanuts compared with Goldman’s other profits from the transaction. But on the heels of a similar outcome for Barclays, Wall Street is getting an education about skewed incentives in terms it can understand.

Conflicts have long plagued the M&A advice business with Goldman in particular both admired and reviled for its ability to make the most of them. After consistently inching so close to the line, though, it appears to have been caught stepping over it.

Faced with the unseemly facts that Goldman owned $4 billion worth of Kinder Morgan while advising El Paso and that one of its bankers also held a $340,000 stake, Delaware Judge Leo Strine meted out his own particular form of justice. He allowed a vote on the acquisition to go forward, despite attempts to stop it, but lambasted Goldman’s behavior as “furtive” and “troubling” and urged shareholders to pursue their lawsuit.

They did, and the case ended last week with Kinder agreeing to pay El Paso investors $110 million. More significant was Goldman forgoing its fee. Though it must sting, the bank’s $1.2 billion profit from selling 36 million shares of Kinder stock in June will help ease the pain.

Even so, an encouraging trend seems afoot. It would have been tough to prove Goldman legally liable for any shareholder losses, yet the bank chose to fold rather than fight. Barclays, too, agreed to cough up more than $40 million of fees earned for advising Del Monte while lending money to the eventual buyers.

The role of Strine and his judicial colleagues can’t be discounted. Bankers work every angle to land big deals and maximize fees, but none will want to endure withering public criticism. The Delaware Chancery Court carries enormous weight in the corporate world, and zingers from the bench can damage reputations with clients. Bruising Wall Street’s wallets and egos ought to have the desired effect.


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