The LA Times reported this morning on a confidential Goldman Sachs research report issued in September that advised institutional investors to hedge exposure to (or establish a short on) California debt. It is no surprise that investors would receive this advice - California has been hit hard by the current financial turmoil and Governor Schwarzenegger has issued numerous dire warnings about a potential budget crisis as the credit markets began freezing up over the summer. What IS surprising, perhaps infuriating, is the source. As an underwriter and advisor, Goldman has received millions in banking fees from California bond issues and it has significant advisory and asset management relationships with pools of public capital throughout the golden state.
This conflict will likely come as a shock to California’s lawmakers who could be forgiven for assuming that, as a reputable investment bank, Goldman’s first loyalty would be to its customers and that it would avoid conflicts of interest by helping one customer profit from another’s misfortune. In this case GS apparently event tried to broker both sides of the transaction –according to the LA Times piece Goldman “regularly urged” California to trade CDS contracts on its own credit itself.
A Goldman “spokesman” was quoted saying the firm was no longer providing that advice without elaborating…
The bankers and traders that built Goldman Sachs over the first half of the last century recognized that the trust of their customers, over the long term, was worth more than any opportunity to extract a quick profit. In those days, of course, GS was still a partnership and the long term interests of the firm and those of its customers were closely aligned.
The fact that the firm’s share price is up almost 3% today on the news that they have alienated the largest municipal borrower in the nation may be an indication that the days of that kind of long term thinking is a thing of the past.