Shock! Goldman favours big clients

August 24, 2009

Susanne Craig uses 2,200 words in today’s Wall Street Journal that state the obvious: Goldman Sachs treats big clients better than small ones.

In any other industry, a company giving favourable treatment to its best customers would stand accused of nothing more than sound business practice.

So it is a measure of the dysfunctional state of Wall Street investment research – not to mention the frenzy of interest in the vampire squid – that Goldman’s activities are considered worthy of such scrutiny.

Here’s the nub of Craig’s case:

Every week, Goldman analysts offer stock tips at a gathering the firm calls a “trading huddle.” But few of the thousands of clients who receive Goldman’s written research reports ever hear about the recommendations.

At the meetings, Goldman analysts identify stocks they think are likely to rise or fall due to earnings announcements, the direction of the overall market or other short-term developments. Some of their recommendations differ from ratings printed in Goldman’s widely circulated research reports. Some Goldman traders who make bets with the firm’s own money attend the meetings.

Investment analysts who say one thing and write something else risk comparison with Henry Blodget, the Merrill analyst who achieved infamy by slapping “buy” recommendations on internet stocks he privately admitted were worthless. Blodget’s private emails were vital in Eliot Spitzer’s crusade against analysts that led to the Global Settlement with Wall Street.

The Spitzer reforms meant analysts could no longer help their employers in drumming lucrative corporate finance work. So they had to justify their existence by generating research that would help clients make profitable trades.

As a result, analysts now focus more on digging out insights and bits of information that generate trading ideas. And their employers make sure that, where possible, those ideas are first shared with clients who are most likely to generate large trading commissions for the bank.

The rules dictate that written research must be sent to all clients simultaneously, which is why most fund managers’ inboxes are clogged up with notes, most of them unread. The only way to quickly identify the valuable information is to spend time on the phone with the analyst or a specialist sales team – a privilege reserved for the best clients.

Implicit in Craig’s article is the notion that Wall Street analysts should be democratically sharing their tips and ideas with everyone simultaneously. It’s a nice idea, but it is at odds with economic reality.

Whatever rules regulators devise, it is hard to expect Goldman, or any other investment bank, not to give preferential treatment to big clients.

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