While all men are created equal, history proves that over time, some men become more equal than others.
That is certainly the case at the highest levels of Wall Street where the ability to move markets give the largest and most secure profits to those who are more equal than others. On Monday (April 16, 2012) the SEC charged that Goldman analysts had divulged material non-public information to preferred clients.
According to the SEC, Goldman didn’t have policies established internally to prevent analysts from sharing non-public information with the firm’s traders, who later passed these ideas to some of Goldman’s preferred clients.
While the practice of preferential customer treatment may sound new, it is not. Goldman Sachs has been doing this since at least 2003 when its analysts held conferences with preferred clients to disclose new research and “their best trading ideas,” according to published reports. These preferred disclosures were held as part of Goldman Sach’s “Asymmetric Service Initiative.” For people who love clichés, this one deserves special attention because it demonstrates that equality would be symmetric, but inequality would be asymmetric. (Interestingly, the military uses “asymmetric responses” in its cliché arsenal of military jargon.)
What Goldman did was pass along its market intelligence to its own traders, who presumably used the information to trade for the company’s own account (and to boost traders’ bonuses) and then passed this information to their preferred customers.
This went on between 2006 and 2011, according to the SEC, so we can assume it was a common business practice, despite the SEC’s warning as early as 2003 that Goldman should “set up and enforce written policies to misuse material nonpublic information obtained from outside consultants.”
As is the custom in the regulatory world, Goldman settled these proceedings without admitting or denying that the practice ever took place. And as is the custom, the SEC acted as if this was the first time this ever happened, even though Goldman paid a fine of $22 million in this most recent brush with the regulators. Maybe the $22 million really was a donation to help reduce the deficit.
Customers as Victims
And just to show that the SEC remains vigilant, a former SEC enforcer said ”You are dealing with Goldman Sachs, which has been in the crosshairs of the public and the SEC since the financial crisis began,” Crosshairs? That should be very reassuring to the public since the financial crisis began in 2007 and this practice can officially be traced back to 2003. And for repeat offenders like Goldman Sachs, this should strike fear into their heart.
What the SEC failed to follow up on was what the preferred customers gave Goldman in return for this preferred information. Was it just more business (IPOs, securities purchases, securities lending, providing liquidity, holding toxic debt), contributing to the Goldman PAC, or were they passing on strategic buy-side information as well? Certainly all of this and anything else Goldman asked for. After all, as the old American express commercials used to say, membership has its privileges.
My bet is that this practice of dispensing preferred information to priory clients, which the SEC officially traces back to 2003, is much older and remains a critical element of the Wall Street business model. This model treats all customers, institutional and retail, as potential victims. It is only a question of time when they become a victim, but if someone uses a scale to weigh the interests of both parties –a broker-dealer and a customer—the scale is always tilted in favor of the broker-dealer. Those are the house rules, just like in Las Vegas. Except in that desert destination, they at least give the losers a free drink.