Macaskill on markets: 50 ways to get your trade through

By:
Jon Macaskill
Published on:

Paul Simon sang that there are 50 ways to leave your lover, and Goldman Sachs has reminded us that there are just as many ways to sneak a trade through, even when conflicts of interest threaten to drag your reputation back into the mud.

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Illustration: Kevin February

Goldman seemed to be coasting to a 2014 victory parade on November 17, as it advised on two acquisitions with a combined value of over $100 billion that effectively sealed this year’s number one M&A ranking for the bank and pushed arch-rival Morgan Stanley below JPMorgan into third place.

In a banking year dominated by an advisory business boom, Goldman looked the clear winner and it has also managed a revival in the trading division that still supplies the biggest portion of its income, with fixed income revenues in the third quarter jumping by 50% over a weak comparable period in 2013.

Goldman had also just stage-managed an adulatory reception to its biennial partnership promotion process, by guiding media reports that hailed its cautious approach to adding new partners (only 78 debutantes at this ball) and a roughly even three-way split between investment bankers, traders and 'others’ in the form of asset management, private equity and administration staff.

As press reports extolled the enduring mystique of the Goldman partnership and employees turned their attention to pitching for elevated bonuses, senior managers at the firm must have wondered what could possibly go wrong.

Plenty, as it turned out.

By the end of a week that started with the two big M&A mandates advising Actavis and Halliburton on takeovers, Goldman was yet again mired in controversy over its approach to managing conflicts of interest.

Allegations of commodity trading skullduggery dominated headlines later that week, after a US Senate committee report accused Goldman of manipulating metals supplies to increase costs for clients.

Senator Carl Levin, outgoing chairman of the investigating committee, seems to have taken a violent dislike to Goldman and appeared determined to have a last swipe at the bank before retiring at the end of the year.

Goldman still so often seems willing to find a way to make sure a trade gets through, even when some rivals are wary

JPMorgan and Morgan Stanley also took their knocks, but the largest section of the Congressional report focused on round-trip trades in aluminum that Goldman’s warehousing unit conducted between 2010 and 2013 that had the effect of creating a bottleneck in supply and higher costs for end users of the metal.

"Aluminum warehouses owned by Goldman, and overseen by a board consisting entirely of Goldman employees, manipulated their operations in a way that impacted the price of aluminum for consumers, while at the same time Goldman was trading in aluminum-related financial products," Levin said.

Goldman’s commodities co-head Greg Agran said that the bank never integrated its commodity warehouse, Metro International, with its market making operations and that there was never any illicit information flow between the two, but Levin was clearly unconvinced. The Senate report said that Agran, who served as head of Metro’s board, and Isabelle Ealet, the former Goldman commodities head who now co-runs all securities, were among almost 50 Goldman employees with access to confidential Metro information.

The round-trip trades concluded in February 2013, just before the introduction of Goldman’s much vaunted new code of business standards in May 2013. So the bank – which is now looking to sell Metro – could potentially maintain that the trades were of a type that would not now be repeated in any unit of the firm, even as it denied that the deals had any ill-effect on metals end users.

But it also emerged that Metro’s vice-president for business development complained in his resignation letter in June 2013 about the appearance of conflicts of interest with staff in Goldman’s trading division.

And an unrelated issue in the week of November 17 highlighted the extent to which Goldman still so often seems willing to find a way to make sure a trade gets through, even when some rivals are wary and its recently installed transaction review process might be expected to counsel caution.

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Macaskill on markets

Goldman has reportedly signed up to a group providing financing for a leveraged private equity bid for Swiss packaging firm SIG Combibloc. The bid is expected to value SIG at around $4.5 billion, or 6.5 times earnings. This is above the ratio of six times earnings that US regulators have been warning banks that they view as a ceiling for sensible leveraged buyout financings.

As so often with Goldman deals, there is no suggestion that it has intentionally breached a clear regulatory guideline. In leveraged finance, as for so many markets, the US regulatory landscape is fragmented and confusing. Goldman, Morgan Stanley and foreign banks such as Barclays and Credit Suisse have their leveraged lending supervised by the Federal Reserve, while the Office of the Comptroller of the Currency regulates commercial banks, such as JPMorgan and Citi.

The Federal Reserve is trying to apply a less didactic approach to leverage ratios than the OCC by giving banks the benefit of the doubt on new financing deals as long as they can demonstrate that they have sound overall risk management processes in place.