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Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks |
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The revolving door between Wall Street and Washington is not working to the industry’s specifications. Robert Khuzami, former general counsel for the Americas at Deutsche Bank, has been leading the charge against Goldman Sachs over alleged CDO fraud in his new role as head of enforcement at the SEC. And Gary Gensler, a former Goldman Sachs partner, has taken an unexpectedly tough line with the industry over derivatives reform in his position as head of the Commodity Futures Trading Commission. Bank heads could be forgiven for feeling that with friends like these, who needs enemies?
The relationship between ex-bankers who move into government and their former employers was always more nuanced than the popular conception that gave birth to the phrase “Government Sachs”.
But the enduring importance bankers place on personal contacts with senior political figures was underscored when Goldman hired recently departed White House counsel Greg Craig – a former Obama confidant – to help defend the bank against the SEC’s CDO fraud charges.
Goldman, which has prospered hugely from exploiting multiple roles within the markets, must now defend itself from threats to its income, with reputational damage to its franchise outweighing direct potential costs from legal action.
Some politicians in Europe called for Goldman to be suspended from government work after the SEC announced its CDO fraud suit. And the US Treasury’s decision to give Morgan Stanley the mandate to sell its Citigroup stake raised suspicions of reluctance to award Goldman a high-profile deal.
Governments are publicly avoiding prejudgment of the firm and Goldman remains a primary dealer in the main sovereign bond markets. It nevertheless faces a battle to convince other clients that it will be unaffected by its current problems.
These clients fall into different categories.
Big independent institutional players have never bought into Goldman’s portrayal of itself as a paragon of banking virtue for which conflicts of interest are resolved with only the client’s interests in mind.
They value Goldman chiefly for its first-class execution and because they hope for an insight into its trading strategies and the chance to get in on deals.
There is no reason for these clients to desert Goldman unless it is banned from any important markets. They will nevertheless feel they have a stronger hand in bargaining with the firm given its current woes. That could lead to attempts to extract concessions on deals as a reward for continuing to allot business.
Clients with even a tenuous link to public bodies – including pension funds as well as municipal or state entities – might feel they have to take a tougher line with Goldman, at least while it is being singled out for supposed market abuses.
That is another reason for Goldman to hope that rival banks will come under regulatory attack for deals done in the credit boom. Similar deals to Abacus were done by banks including Citi, Credit Suisse, Deutsche Bank, Merrill Lynch and UBS. If no settlement is reached with the SEC, Goldman can be expected to cite those banks’ deals in court. It might also be tempted to question the role played by its chief SEC tormentor, Khuzami, while he was at Deutsche Bank. Khuzami was at the bank between 2002 and 2009, at a time when recently departed Deutsche Bank ABS trader Greg Lippmann was pursuing a policy similar to that of Goldman Sachs in placing bearish credit bets against the mortgage market while encouraging hedge funds to set up deals with the same bias.
As Goldman considers the regulatory threat from a city where it once seemed so well connected it should remember two old saws about politicians. One is that if you want a friend in Washington you should get a dog. The other is a sanitized version of a quote attributed to a Democratic politician: “If you can’t take their money, look them in the eye and then vote against them anyway, you have no business being here”.
