Goldman Sachs- the SEC tries to create a villian

Last Friday the Securities Exchange Commission filed suit against Wall Street firm Goldman Sachs claiming that the firm did not properly disclose to buyers of a specific "synthetic CDO" investment that there were parties betting the other side of the February 2007 deal.  Surely the SEC knows that when such a synthetic instrument is created there are buyers on the "long" side and sellers on the "short" side (or the broker itself is acting as principal and taking a side of the deal).  The fact that the deal worked out great for the sellers and horribly for the buyers doesn't mean there was fraud involved.  In fact Goldman apparently had a little bit of the long side as they lost $90 million on the instrument involved.

This situation also should be a chance for the investing public to again understand the roles of various players, including firms such as Goldman who serve as broker and often as principal.  Lloyd Blankfein, Goldman CEO was quoted in 2004 to say, "In our market-making function, we are a principal.  We represent the other side of what people want to do.  We are not a fiduciary...we are not managing somebody else's money."

To fuel populist support for financial reform, the SEC apparently wants to cast Goldman Sachs in the role of a villian using the hindsight of a February 2007 trade on a housing market that everyone now knows was already in serious decline.  There is no such villian, simply a trade where the smart money profited enormously while another suffered serious losses, just the capitalist system at work.

The investing public should take this opportunity to again remind themselves of the various roles of different parties.  As Mr. Blankfein says, a broker is not a fiduciary (remember a fiduciary is one who is legally charged to act in the best interest of their client).  Just because someone calls themselves an adviser, doesn't mean they are acting on your behalf.  Just ask the investors who purchased the above referenced synthetic CDO with Goldman Sachs as their adviser.

p.s.  We  remind all that Payne Wealth Partners is a fiduciary and we take very seriously our obligation to act in the best interests of our clients.

Report on reforms to restore investor confidence

On July 15 a blue-ribbon panel co-chaired by former SEC chairmen Bill Donaldson and Arthur Levitt issued their "Report on Financial Regulatory Reform: The Investor's Perspective" http://tiny.cc/cyFtq. There are many encouraging comments in this report, including on page 14 where we find "In order to improve the quality of advice provided to retail investors and to protect them from abusive practices, the SEC should be empowered to reform compensation practices that create unacceptable conflicts of interest, improve pre-sale disclosures, and subject all those who provide personalized investment advice, including broker-dealers, to a fiduciary duty."

Page 15 of the report addresses the problems associated with "... a series of decisions by regulators over the years allowed brokerages to call their sales representatives "financial advisers," offer extensive personalized investment advice and market their services based on the advice offered, wall without regulating them as advisers.

We hope Congress will carefully consider the matters addressed in this report. Investors will be best served by advisers who are subjected to a fiduciary duty.

Obama's plan includes fiduciary standard for brokers

http://tinyurl.com/kvza6l

One of the outcomes of this financial upheaval is a revisit of regulatory governance at all levels of financial services. Although this is just in the proposal stage, and must work its way through Congress, it is encouraging to see the White House this week advocate for a fiduciary standard for brokers-- meaning they must act in the best interest of their clients. Presently, brokers are governed by a much lower "suitability" standard. Registered invesment advisers (such as Payne Wealth Partners) are required to operate to a fiduciary standard. For more on the subject of fiduciary, visit http://www.focusonfiduciary.com/.

Contacting Us

For a no-obligation consultation with one of our professionals, call Payne Wealth Partners at 812-477-6221.