Refriending the Bank

in an update on Goldman Sachs, The Economist showcases an Underbelly favorite--the fiduciary responsibility of banks and in particular, the tectonic shift away from the world in which your banker was your loyal ally and wise counselor, to the world where your banker is just another wild beast ready to eat your guts out. "The conflicts issue," as The Economist characterizes ot "is the most challenging" regulatory issue facing GS Chairman Lloyd Blankfein. Blankfein, the magazine says

rose to the top touting careful conflict management as a competitive advantage. If Goldman could both act as adviser, financier and marketmaker for clients and invest aggressively for its own account, while keeping those roles in balance, it could steal a march on rivals that shied away from this juggling act.

But the conflicts became more tangled as finance grew more complex. And as Wall Street thrived, the bar for what constituted acceptable practice within the industry sagged. “Twenty years ago the [big firms] avoided conflicts. Over time they not only embraced them but stopped asking clients what they thought,” says Clayton Rose of Harvard Business School, speaking of Wall Street generally.

Goldman led the way in exploiting grey areas. But activities that may have got the benefit of the doubt in the bubble years now look like shameless envelope-pushing. No wonder some investors have come to see Goldman as more of a threat than an ally. As the manager of a large hedge fund put it recently, Goldman’s clients talk about it in the same way that campers chatter nervously about grizzlies.

Even though they almost exclusively serve sophisticated institutions, not retail customers, Goldmanites accept the need for change. In the current environment “we can’t say we work in a world of consenting adults, and screw anyone who doesn’t understand,” says one. Moreover, they are well aware that the clause in America’s financial-reform bill targeting “material” conflicts in securitisations is aimed primarily at Goldman.

It will be up to regulators to ensure that any changes in Goldman’s approach are not merely cosmetic, ,,,

Well, good luck to them. It seems like light years from here back to the time before Orange County, before Proctor & Gamble, before Gibson Greeting Cards, before Orange County and all those related episodes where we learned that the bank sucked out all of your proprietary information so as better top take advantage of you.