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Interest of conflicts

30 September 2014 By Jeffrey Goldfarb

Another day, another conflict of interest situation for Goldman Sachs. New internal rules at the securities firm impose fresh limits on bankers investing in specific stocks, bonds and hedge funds. Goldman knows too well how easy it is to cross a line when treading at its edge. The new policy raises a bigger question, though: Why are Wall Street dealmakers allowed to own individual securities at all?

No financial institution gets more attention for its handling of delicate, potentially hazardous relationship conundrums than Goldman. Its British advisers, for example, received a notorious “spank from Hank” – Lloyd Blankfein’s predecessor at the helm, Hank Paulson – back in 2006 when they followed a pitch to defend BAA with the possibility of Goldman buying a big stake in the operator of London’s Heathrow airport.

More recently, it was a U.S. court that took umbrage at Goldman’s unbecoming presence on both sides of a deal. Delaware Judge Leo Strine in 2012 called it “furtive” and “troubling” that Goldman owned a multibillion-dollar stake – and one of its senior energy bankers a smaller one – in Kinder Morgan while advising the pipeline operator’s takeover target El Paso. The bank surrendered its fee on the transaction after El Paso shareholders sued.

The latest trading restrictions suggest a delayed reaction. Goldman told bankers last week they could no longer buy shares or debt instruments of particular companies, and that certain funds like those of activists or event-driven strategies were also off-limits. While employees aren’t being forced to offload anything from their portfolios, Goldman’s policy nevertheless seems to be generally stricter than the patchwork of policies across Wall Street.

Most banks require staff at least to disclose their investments, cross-reference with a centralized client list and seek permission from managers. The whole structure is backwards, though. The default across the industry should be that bankers avoid owning individual securities, with permission sought only for exceptions. What’s more, dealmakers could be given, say, seven years to divest themselves of such stocks and bonds to reduce any penalty for selling.

First, it would eliminate the vast time-sucking process of getting approval for every investment. Better yet, in one fell swoop a whole conflict of interest category – one that regulators have not yet contended with but might take up in the future – would go away. Maintaining the status quo, or tinkering around its edges, only speaks to a culture loath to change.


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