Tuesday, January 19, 2010

Goldman’s LB to FCIC – nobody knew "minute by minute” Where is compliance with Suitability & Fiduciary duty owed to pension plan and other customers?

“Minute by minute” – LB’s FCIC testimony needs careful parsing – traders trade (for the house only), sales people sell (“Housewares” to / from but usually to Customers) somehow it seemed as if Mr B tried to erect a "force field" to shielf off some harsh FCIC members' barbs.

Which Goldmanites is Mr B referring to such that they didn’t know “minute by minute” what was going to happen? Are we to believe that Goldman had its LPT traders selling its top of the line “housewares” product to Institutional accounts like ERISA and other types of pension benefit plans? And if so – what were the incentive compensation policies for same? In contrast to the reasonable beliefs and/or expectations from its customers?

Traders trade for the house, Sales people, series 7 licensed, sell to customers.
Further we would assume Goldman’s traders are NOT the one and the same GS sales people – different business cards, traders wear jeans, sales people wear suits with neckties, yet where did the salespeople get the “houseware products” – perhaps from GS’ very own LPT desk?

Were customers deserving of full or any market color whether from the GS sales desk and leveraged proprietary trading (LPT) desk? Was GS taking an opposite view or contra position at the same time they sold or distributed “product” to customers from inventory? Did Goldman share ALL the information they could have with customers? One example, 2005 (not a typo) vintage stands out from an S&P Ratings Direct titled “Who will be left holding the bag?” http://www2.standardandpoors.com/spf/pdf/media/wyss_091205.pdf
wonder if GS had any reaction to that one; informed its customers, counterparties, securities lending units or more importantly took any ACTION?

Or was Mr B referring to his firms "High frequency trading" HFT during his FCIC testimony? Was LB conflating his firm’s proprietary operations in contrast to duties owed to customers?
Heres a recent article about HFT about Goldman and many others: http://advancedtrading.com/algorithms/showArticle.jhtml;jsessionid=5AIIS154RVBOTQE1GHOSKHWATMY32JVN?articleID=220301041&pgno=1

Goldman's Housewares - were they in the "moving, storage business or both"?
Clearly when the Gummint - gave CASH to the likes of GS - it would seem to imply it was for housewares in stock yes? Otherwise - what was the purpose of CASH to only "certain" firms?
Perhaps those housewares were temporarily out of season?

ALL Customers owed Suitability determination by registered reps
Goldman’s sales people are registered reps, like many others – holding at least a series 7 licenses – and as a result owe all customers a suitability determination at the point of sale.

CONTROL over an account is also a critical determinant in the nature, timing and extent of that suitability determination; if not a fiduciary duty to that account. When it comes to selling, providing customers "desired exposures" and/or advising Pension Plans Goldman’s sales desks owe, it seems to me, the higher fiduciary duty IN ADDITION, correct in addition to a suitability determination.

Considerations Regarding the Scope of Members' Obligations to Institutional Customers
And Goldman may be reminded of FINRA’s special INSTITUTIONAL suitability rule excerpt The link to the rule known as IM-2310-3. Suitability Obligations to Institutional Customers http://finra.complinet.com/en/display/display_viewall.html?rbid=2403&element_id=3638&record_id=4315

Excerpt here:
The two most important considerations in determining the scope of a member's suitability obligations in making recommendations to an institutional customer are
1) the customer's capability to evaluate investment risk independently and
2) the extent to which the customer is exercising independent judgment in evaluating a member's recommendation.

A member must determine, based on the information available to it, the customer's capability to evaluate investment risk. In some cases, the member may conclude that the customer is not capable of making independent investment decisions in general.

In other cases, the institutional customer may have general capability, but may not be able to understand a particular type of instrument or its risk. This is more likely to arise with relatively new types of instruments, or those with significantly different risk or volatility characteristics than other investments generally made by the institution. If a customer is either generally not capable of evaluating investment risk or lacks sufficient capability to evaluate the particular product, the scope of a member's customer-specific obligations under the suitability rule would not be diminished by the fact that the member was dealing with an institutional customer. On the other hand, the fact that a customer initially needed help understanding a potential investment need not necessarily imply that the customer did not ultimately develop an understanding and make an independent investment decision.

The above requires, in my view, that before recommending or soliciting a transaction – GS needs to assure itself, after undertaking a due diligence process (in addition to FINRA Rule 405 commonly referred to as the "know your customer rule - every trade, every order, every account, every time", to protect the customer, be sure that the customer has independent means, capacity and has itself understood the risks and rewards of the subject trade. And when it came to transactions involving Goldman’s private label derivatives (perhaps colored by on and off shore affiliates, certain counter parties' indicative collateral valuation, prime brokerage / hedge fund customers or on and off shore securities lending parties) what further duties or disclosures may have been in order? Stay tuned sports fans.

Solicited Trades
Surely as Mr B must of course, realize that nearly ALL securities sold to customers from inventory are “solicited” by some highly trained and supervised salespeople. And surely Mr B would agree generally a customer’s, especially a pension plan’s purchase of any derivative MBS or related security is usually something to be treasured, a keepsake, but not always, held for longer time periods (not to be traded).

In other words the pension plan is trying to do what is fundamental to its existence, match cash flows from investments to payments needed to fund expected liabilities. And prudently fulfill with brokers' assistance, its fiduciary duty for one purpose only – provide the promised benefits to the beneficiaries of the plan.

I and a few others are just curious to learn if there were EVER any convos regarding how certain GS housewares were directly benefitting the plan's actual beneficiaries.

The same info?
A critical distinction regarding Mr Viniars’ assertion “that they all had access to the same information” - Uh GS’ leverage ok – not only not permitted at Pension plan customers; but omits / hides an essential underpinning for the VERY same derivatives' values – subtract the GS leverage and these securities are worth you know what!!! Less.

GS was allowed to and used leverage in its LPT operations but pension plan customers are NOT permitted to use explicit leverage – a critical difference.

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