Moral obligation towards clients

It\’s not easy feeling sorry for Lloyd Blankfein but I do here:

Lloyd Blankfein has admitted that he believes Goldman Sachs has no moral obligation to tell clients it is betting against a product it is asking them to buy.

The very act of selling something to someone is a bet against that product.

If I were convinced that BP shares were worth more than £5 then I wouldn\’t sell them to you at £5 would I? That I am willing to sell them to you at £5 means that I think £5 is worth more than a BP share.

I am, by the very fact that I\’m undertaking a transaction with you, showing that I think you\’ve over valued the item. This is as true of apples, houses, bales of hay and stocks, bonds and collateralised debt obligations as it is of anything else.

10 comments on “Moral obligation towards clients

  1. This is absolutely true if you are selling to a client but not so if the client is paying for advice. I would not be surprised if Goldman’s were paid for the advice they provided.

  2. “I am, by the very fact that I’m undertaking a transaction with you, showing that I think you’ve over valued the item”

    I don’t think you mean ‘overvalued’, more ‘higher valued’? People can have (correct) different valuations of the same thing.

    Tim adds: Bit of a lingustic minefiled really. Yes, different people can have different valuations (that’s what makes a market, after all) and they are correct for them. But if I’m selling I value the item at my valuation: if someone else’s is higher we trade and while his valuation is correct for him it’s, by my valuation, an over valuation.

  3. “Over” valued seems a tad emotional – “differently” valued might be better. For shares and the like “over valued” is right, but if I have two loaves of bread and you haven’t got one and are hungry then it is a simple difference, I am not necessarily exploiting you in the transaction.

  4. Not necessarily. Even though I consider that my n x BP shares are worth more than £5, perhaps I need that n x £5 now. Or maybe I see an opportunity to use that n x £5 that will gain me more than my projected appreciation on those shares.

  5. Likewise Tim, if I have a cafe that produces a million cups of tea, selling them to you is because you value the tea more than the money and vice versa with me but also because I can’t drink a million cups of tea myself.

  6. The point I think GS was trying to make was a bit more subtle. They were trying to differentiate between a trading desk and the whole of GS.

    It’s reasonable to expect a particular trading desk to be straight with their clients, and to refrain from selling them products that that desk has shorted.

    However it’s not reasonable to expect a particular trading desk to whizz round the whole of GS every time it wants to sell something just in case another desk in another office in another part of the world happens to have shorted it.

    I found it extraordinary that US politicians, who have first hand experience of trying to manage a complex, dispersed, dysfunctional organisation couldn’t grasp this themselves.

  7. A colleague mentioned today that Goldman Sachs had been indulging in wild speculation, and that was the problem. I laughed and said that the Pope had been conducting Mass.

    Investment banks are speculators by their nature, the buy an sell things all the time.

    If they advised clients to buy something, that they privately thought was worthless, then that is wrong. If they simply sold something that they thought was worthless, well thats the nature of their business.

  8. Tim, I’m don’t get your logic here. Surely the point of any exchange is that it is of mutual benefit. In the case of a house it is overvalued to the seller because factors such as location, size don’t match the sellers needs it would be undervalued to the buyer becuase these factors would match their needs.

    In the case of Goldman’s thought their product was overvalued, it was that they believed a large pile of cash now was worth more than a regular income stream over several years. That, I assume was the basis on which buyer and seller believed the transaction was taking place.

    Blankfein’s words (to me at least) seems like the equivalent of a second hand car salesman saying he has no moral obligation to tell his customers that the car they’ve just bought will break down five miles down the road. Theyre the words of a conman.

  9. Andreas: Absolutely wrong. Or rather, almost right, but you’re missing the key factor: Risk. What location is to a house, risk is to a security. Being in Glasgow doesn’t make a house “good” or “bad”, but it does make it rather less valuable to a given person…unless they want to live in Glasgow. :)

    IKB desperately needed some high-yield investments, and was more than prepared to accept the high risk that came with those. They actively sought – and obtained – the opportunity to take a big bet on the US subprime market.

    Goldman, by contrast, was relatively risk adverse. Their financial position was fine, and they’d lost some money on housing market bets in previous years. Having got their fingers burnt once, they had no interest in making any more large bets. They were happy to help IKB find a high-risk investment, but they didn’t need or want to do the same (nor would IKB have assumed otherwise).

    The best analogy I can think of is a realtor who doesn’t live in a particular suburb herself, but is still happy to help you find a house there so you can be closer to your job…then gets sued when a wildfire wipes out the entire neighborhood because she didn’t tell you (and you didn’t ask) that she actually lives on the other side of town.

    (To be clear, the SEC suit is about something else entirely – whether or not Goldman knew about Paulson’s role in picking the securities, if so whether or not they disclosed it, and if not whether or not they were legally required to do so. To stretch the housing analogy to the breaking point, it’s a little bit like complaining that the realtor didn’t tell you that the architect of the house ALSO didn’t live in that suburb. Sounds silly in the context of housing, but securities have different rules.)

  10. I’m not sure it’s worth examining the logic. This isn’t a legal and rational process in reality – it’s a political and emotional one. Not good news for Goldman.

Leave a Reply

Name and email are required. Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>