Sideways: The ties between Wall Street, regulators and White House


Jon Macaskill
Published on:

If the Securities and Exchange Commission (SEC) does decide to weigh in on the issue of whether or not Blackstone’s trading in Hovnanian debt and default swaps constitutes market manipulation, it will revive questions about SEC chairman Jay Clayton’s ties to Goldman Sachs.

In Clayton’s private-sector career as a lawyer at Sullivan & Cromwell he worked extensively for Goldman, including a role advising the firm when it received a $5 billion investment from Warren Buffett that proved to be a crucial vote of confidence in it during the 2008 credit crisis.

Jay Clayton, SEC
Clayton’s wife Gretchen Butler Clayton also worked for Goldman Sachs as a wealth adviser, although she announced her resignation from the bank after he was nominated by president Donald Trump last year to serve as head of the securities industry regulator.

A move by the SEC to join fellow regulator the Commodity Futures Trading Commission (CFTC) in examining potential market manipulation could help the interests of Goldman, which is believed to be a net seller of default swap protection on Hovnanian.

The CFTC surprised derivatives industry representatives recently when it issued a public statement about its concern over manufactured credit default swap events in reaction to the Hovnanian trades.

The CFTC chairman Christopher Giancarlo is another lawyer with ties to the financial sector, where he served as an executive for interdealer brokerage GFI. His indication at the recent International Swaps and Derivatives Association (Isda) annual general meeting that regulation for swap execution facilities will be eased later this year was no great surprise from a Trump appointee with a market background, but it did underscore the links between regulators and their charges.

Complicated connections

Lawyers with extensive Wall Street experience inevitably bring potential conflicts of interest when they take regulatory jobs. Clayton’s predecessor as SEC head, Mary Jo White, had worked on behalf of JPMorgan and Bank of America before she was nominated to run the agency by president Barack Obama, so conflicted nominees are not the preserve of Republican administrations.

There is an added risk of conflicts of interest when couples work in the financial sector, as was the case with Clayton and his wife.

Complicated connections can develop, even where there is not a direct conflict of interest. Darcy Bradbury, a partner at hedge fund DE Shaw, was recently reappointed to the Isda board, where one of the likely points of internal debate in the coming months will be how to respond to calls for changes to credit derivatives market practice in the wake of Blackstone’s trades in Hovnanian debt and swaps, for example.

Bradbury’s husband, Eric Seiler, meanwhile is acting as a lawyer defending Blackstone’s GSO unit against a suit by hedge fund Solus alleging fraud and market manipulation.

And Bradbury herself once worked at Blackstone as co-head of client relations and marketing for its alternative asset management group, which took a stake in Solus in 2015, before the current dispute between the fund and GSO.

Confused? You could be forgiven for wondering where the conflicts and overlaps end in this case.

Euromoney has pointed out before that GSO’s profits from trades in Hovnanian debt and swaps could have a knock-on effect of reducing the value of the Solus stake held by another division of Blackstone.

If a dispute escalates between Blackstone and Goldman Sachs over the Hovnanian trades, that could end up pitching bankers at Goldman who rely on fees from the asset manager against fixed income traders within the firm who want to avoid dealing losses.

Let’s hope there aren’t any married couples on either side of that potential divide at Goldman Sachs.