Cover me

Goldman conflicts: Goldman Sachs is being dragged over the coals again. This time, though, comparisons to blood-sucking sea creatures are absent. But a report in the Wall Street Journal that the Wall Street firm has been favouring a small group of clients with stock picks while leaving many others in the dark certainly leaves a fishy smell. But it’s not as heinous as it first appears.

Sure, it has the elements of a good scandal: analysts publish their views on a stock and then appear to give contradictory advice to big hedge funds like SAC and Citadel in weekly meetings called “trading huddles”. And the participants even go out of their way to avoid calling any of their ideas buy or sell recommendations.

But there’s less to this brouhaha than meets the eye. The meetings are designed to generate short-term trading ideas on companies, not change the longer-term view of an analyst’s rating. Since stocks generally go up and down each day rather than heading in a straight line towards an analyst’s longer-term estimate – should he or she ever be that prophetic – trying to make some cash out of that is hardly controversial.

So they don’t seem to be breaking the rules. And such trading calls rarely led the analysts to change a rating soon after – just 5 per cent of the time in one three-month period last year, according to Goldman. Moreover, half of those changes went against the huddle call.

It’s no surprise that Goldman – and other investment banks – want to keep their best customers happy – hedge funds, after all, as frequent traders bring in a large portion of client trading revenue. But the Wall Street firm could have devised a better way of satisfying them. Before its demise, Lehman Brothers created a cadre of desk analysts whose mission was to forgo published research and impart short-term calls to clients over the phone. And Morgan Stanley sends blast emails to all clients detailing its short-term calls.

That might be laborious and even risk annoying clients who’d rather not be peppered with such information. But it would leave Goldman covered against assertions that its favouritism might be underhand.