Do Market Principles Apply to Market Makers?

The New York Times reports that some customers of Goldman Sachs (and other investment banks) are “worried” about the dual, and often conflicting, role the banks play in the market. The report indicates that executives at some of Goldman’s clients, including the failed bank Washington Mutual, were concerned about working with Goldman at least as early as 2007. 

And, while the S.E.C.’s fraud complaint questions whether Goldman’s actions were illegal, their actions were at least questionable from a moral and ethical perspective, even as measured by Goldman’s own Business Principles. As an example: “Our clients' interests always come first.” Another of Goldman’s principles is “Integrity and honesty are at the heart of our business.” Unfortunately, to continue the analogy, it’s a lot less clear what is at the limbs.

As I’ve noted before, I am not sure there is a legal problem with Goldman’s behavior (at least as currently alleged). I do, however, think that there could be significant repercussions from a business perspective, as this report seems to indicate. I don’t think Goldman is going anywhere, but I do think that they may lose some clients or have others less inclined to work with them as often as they might have previously. That certainly won’t help the bottom line.

Just like auto mechanics, restaurants, and other service industries, Goldman is in a market with significant competitors for clients. If most clients actually care about Goldman’s behavior (a point about which I am not entirely clear), Goldman will either have to convince them that they have changed or the clients will go somewhere else. If they are unable (or unwilling) to change, Goldman will have done well in the short term, but sacrificed significant long-term gains by taking positions against their clients. Of course, this assumes the market for investment banking services operates like other services markets. Only time will tell on that one.

--Josh Fershee