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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I love how all these people who barely understand the business or what Goldman does, are suddenly critical of what Goldman does.

Posted by Alejandro | Report as abusive

Mr. Larsen: I’m not sure what your point is. Are you arguing that what Goldman did is legal? Or are you arguing that the law should be changed? It’s not clear in your post, and you seem to conflate the two points.

E.g., you write: “The rules dictate that written research must be sent to all clients simultaneously ….” You then write: “Whatever rules regulators devise, it is hard to expect Goldman, or any other investment bank, not to give preferential treatment to big clients.”

Those two statements seem to lead on to infer that you think Goldman Sachs has broke the law; and that you are quite OK with the lawlessness.

Mike, nobody is suggesting Goldman broke the law. The implication of the WSJ piece, however, is that they are bending the rules by giving big clients preferential treatment.

My point is that big clients will always get preferential treatment. Indeed, why would Goldman bother spending hundreds of millions on a team of research analysts if their expensive insights cannot be used for the benefit of its best clients?

Posted by Peter Thal Larsen | Report as abusive

The problem, Mr. Larsen, is that those clients seem to be buying ahead of the reports; and then dumping stock once the report has been publicly released. That IS illegal. Goldman knows that it’s clients are breaking the law. By continuing to give their clients tips, Goldman is complicit.

[...] to select clients and internal traders?  (WSJ also DailyFinance, FT Alphaville, Clusterstock, Peter Thal Larsen, Zero Hedge, naked [...]

When will people realise that they can make their own decisions on what stock to buy. You can ban beer sold in glass pints but you can’t stop a drunk falling over and injuring themselves. You can’t legislate to wrap everyone in cotton wool.
If you do your own research you can achieve more than the banks, how many banks got a 100% short on Lehman but I personally know someone who has, who did his own research, and there are others like this. Look at all the opportunities the traditional finance folk have missed. They’re too busy fumbling around with Markowitz portfolio theory instead of growing a pair, using common sense, experience or insight.
When will Americans do their own legwork when investing their own money. Goldman Sachs analysts are not really doing an invaluable job so why are we to be worried.