Submitted by John Aziz of Azizonomics
The Biggest Conflict Of Interest In Finance?
Maybe this is a naive question, but as Goldman clients get skinned again and again and again and again and again by Goldman’s failed calls — while Goldman itself continues to rack up prop trading profits — I keep wondering just why anyone would take investment advice from a trading firm?
And beyond that, why is it even legal for trading firms to advise clients? Isn’t this the biggest conflict of interest possible? We know firms including Goldman have advised clients to buy junk that the trading arm wants to get off its books.
A few months back former Goldmanite Greg Smith wrote:
What are three quick ways to become a leader at Goldman?
a) Persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit.
b) Get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them.
c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.
It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.
How is intentionally misleading clients to offload junk not illegal? Is this not a huge regulatory oversight? And why — when there is ample evidence that this has happened before and continues to happen — are so few people talking about making it illegal?
And beyond that is it not blazingly obvious that the supermarket megabank model that puts clients’ interests under a single roof with the banks own trading book breeds fraud? Should there not be a new Glass Steagall not only to separate retail from investment banking, but also to separate prop trading from flow trading?
Or are we going to leave the world to the vampire squid?