BOSTON (TheStreet) — A so-called Chinese Wall is supposed to exist between investment banks’ research and asset-management divisions, but recent calls, especially coming from subprime-securites proponent Goldman Sachs(GS_), warrant further scrutiny.
Goldman helped to catalyze the recent commodity sell-off as its researchers expected little upside when the economy hit a soft patch. Crude oil tumbled beneath $100 on that report. Then, two days ago, with few fundamental changes in the demand outlook, Goldman reversed its stance, advising clients to buy.
This flip-flopping from Wall Street’s most closely followed researcher is being perceived by some as client-fleecing since the bank is able to trade in proprietary accounts before it releases research and the markets react, as they often do to Goldman’s calls.
Similarly, many sell-side researchers award stocks “buy” or “overweight” ratings even as their internal asset-management units unload shares, presenting a conflict of interest and ethical dilemma. Goldman’s most famous front-runs to date were the Abacus transactions, through which the bank allegedly postured for high ratings for its mortgage-backed CDOs, sold them to clients and then shorted them.
News broke yesterday, or rather, a blogger pulled data yesterday to show that Goldman dumped 1,260,802 shares of Apple(AAPL_) during the first quarter, even as its research division rated the stock “buy” and maintained its lofty $470 target. Little due diligence is done in the journalism community on the interplay between asset-management and research units.
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There is no truer statement than “Little due diligence is done in the journalism community…” They are scribes, nothing more. They will, in general, simply repeat without question what they are told. CNBC is especially bad. The Financial Times is, IMO, the least scribe-like.
look I think this is really over-egging it.
I worked at a firm where the research was respected by the street. To be honest (as against being dishonest) we had absolutely no respect for what those fuckers in research were saying, nor did we care.
If we liked something we held it and if we didn’t we sold it no matter what they said.
Researchers are not respected by house traders by and large because they are just that, piddly little fuckers who have so-called opinions but never put their own balls on the line for fear of losing them.
If research is saying buy, and trading is selling…. isn’t that the ‘Chinese Wall’ at work? and not a ‘conflict of interest?’
In your example, research would be improving the sales price that the traders were able to get. The timing of the research call and the trading action can create a conflict of interest.
I think the larger problem is that the same name brand is attached to both the research and the trading. One might reasonably believe that a Goldman Sachs reasearch call such as “we believe that XYZ is a good buy below $40” reflects what Goldman Sachs believes, when, in fact, the firm’s trades with its own money might reflect the opposite belief.