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Short shrift

In a week where there have been upsets a plenty, and a lot to get your teeth into if you are a serious investor, I confess to having become mesmerised by the Goldman Sachs’ affair.

Ash rather than cash from Iceland may have provided a diversion, as has the growing belief that politics in this country may be on the brink of a seismic shift, but in the end it has been the apparent moral bankruptcy of the world’s most powerful investment bank that grabbed my attention.

When I first started out in the investment world, I spent a brief period on the institutional sales desk of one of the City’s leading stockbroking firms.

Our senior partner was a powerful figure – the sort of person who had you automatically straightening your tie whenever he entered the room. Back then – in the mid 1960s – we were regarded as progressive because we had a research department, except that an important part of its function was to develop arguments for buying shares the firm wished to shift.

I well recall the senior partner demanding a buying case for a company, following a sale order for a substantial number of shares being received from one of the firm’s institutional clients.

A private client manager had sufficient nerve to state he would not be buying the shares for his clients, so he was persuaded to add the shares they held to the selling order while the rest of us set about finding buyers for the lot.

The rationale, of course, was two commissions instead of just one.

This appears to be the nub of the Goldman Sachs’ affair. A respected and successful hedge fund manager persuades a leading investment bank to create an investment product which it can then short because it believes the instruments on which the product is based will fail. The bank then sells the product on to other customers.

It sounds an open and shut case, except nothing in the world of CDOs and SPVs is ever that simple.

For a start, an independent manager was appointed to select the underlying securities. And we know that the SEC’s decision to pursue the court action was taken by a majority vote and not unanimous, suggesting doubts that it would succeed.

But the fact that this action is taking place at all indicates a political agenda. This is reinforced by the words of our own Prime Minister and the decision of the regulatory authorities in Germany and France, as well as here, to take a closer look at Goldmans.

Whether or not the bank, or the employee at the heart of this – the so-called Fab Tourre – is found to be at fault, it is clear the attitude towards investment banks and the remarkable profits – and bonuses – they earn is now the focus of continuing attention and probable action.

As for the issues surrounding how the political establishment might cope with a hung Parliament and the way in which markets could react, I confess that when you are reading my next contribution in a week’s time, I will (I hope) be chilling out off the coast of Africa – having voted, of course. It is pointless trying to second-guess the outcome this far ahead, but what might emerge from the type of scenario currently being painted is far from clear. We may be seeing a similar dramatic change in the world of investment banking.

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  1. The author sounds more like a lobbyist than an analyst. The decision to go after Golden Sacks may have been taken by majority vote, but that is the way of partisan politics in America. If the Republicans were in power, Golden Sacks would have been appointed to advice them on the reforms, if it got that far.

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