The eagerly awaited Goldman Sachs internal review is out.
As the Wall Street Journal reported, the document was commissioned last year after the bank got into hot water, in the wake of the Fabulous Fab affair, over how it balanced its own interests with those of its investment clients.
And after a year in the making, the 63-page document outlines no less than 39 recommendations to make Goldman into a better bank. These range from financial reporting to employee training to openness about potential conflicts of interest.
And just in case clients still had any doubt — forever shall the bank now be guided by these principles (and by “forever” we mean until the bank gets into trouble again, in which case expect revisions):
One of the biggest changes, meanwhile, is the structural reshuffle to be implemented across of all of the bank’s internal divisions.
So having looked like this…
… Goldman Sachs will now be amended to look like this:
Which, of course, mostly does way with the bank’s proprietary focused ‘Principal Investments’ division.
Indeed, from the look of things, all principal-backed activities at Goldman Sachs will now be done in the name of client execution only — just as Michael Lewis speculated they might.
And to iron out any possible confusion here, Goldman spells out exactly what it means by client activity thus:
Of course, that still leaves market-making and underwriting as two possible areas which could make use of the group’s own capital for trading.
So to clarify just how non-conflicting that activity will be, Goldman provides the following explanation (our emphasis):
While most of the roles, activities and responsibilities highlighted in this matrix are straight forward, the terms “market maker” and “underwriter” require some explanation. Market making refers to our secondary sales and trading activities.
We can act as an agent for buyers and sellers by executing their orders in the market or act as a principal by supplying liquidity directly to our clients. We do this regardless of market conditions and our view of the market. Our liquidity obligations in certain markets can also be explicit and obligatory – when, for example, we act as a Primary Dealer in government securities markets or as a New York Stock Exchange Designated Market Maker.
Our market making responsibilities can also be implicit. In the credit and mortgage markets, for example, our clients expect us to be willing to sell positions to them as a principal or to be willing to buy positions from them. Market making involves risk, and as a result, market makers engage in risk management activities such as hedging and managing inventory in both cash and derivative instruments. Market makers provide liquidity and play a critical role in price discovery.
They contribute to the overall efficiency of the capital markets, facilitating capital raising for corporations and governments and allowing money managers to better manage their portfolios and generate returns.
Interestingly, though, this doesn’t actually specify that the bank won’t be taking directional positions for its own book while it goes about aligning “hedges or managing inventory in both cash and derivative instruments” .
Hmmm.
Related links:
Report of the Business Standards Committee (PDF) – Goldman Sachs (via WSJ)
Unintended consequences of a prop desk’s extinction – FT Alphaville
Prime custody, and the business of collateral – FT Alphaville
All eyes on broker-dealer internalisation - FT Alphaville