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Comment by xadhominemx | Hacker News Reader

The equity research department is firewalled off from the deal teams doing the offering. It would be unethical if the people who published the research note even knew anything about the offering.

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That is true. Also, Goldman Sachs is so experienced with conflicts of interest that they are just very good at handling them. You see Goldman Sachs experiences so many conflicts of interest all the time that they have obtained expertise in handling these conflicts that people like me and you cannot even imagine.

The modern Goldman banker is a unique creature with a conscience that is so complex and evolved that he can earnestly and passionately defend two positions that would seem to me and you completely opposite.

... Ok I have stopped laughing now and I am starting to get angry so I might as well get back to work ...

beautiful.

You are conflating the investment banker and the equity research analyst, which have legally mandated information sharing firewalls. Also this potential conflict is clearly and openly disclosed, e.g. "This company publishes research and also seeks to do investment banking business with Tesla".

Further, Goldman conducted a secondary share offering for Tesla as recently as summer 2015, so it was exceedingly obvious to anyone who makes investment decisions based on the research that this conflict exists.

I have worked at several wall street firms and also worked for firms in silicon valley, and I frankly noticed more numerous and blatant conflict of interest situations in silicon valley.

EDIT/UPDATE: Prominently displayed in large font on page 1 of the Goldman research report on Tesla:

"Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision."

No contest to the claim that there are conflicts of interests in silicon valley, but the firewall / chinese wall between research and banking groups is pretty spotty, despite all the formal processes to try to maintain it.

Personally saw tons of sketchy things going on with MDs on IB side influencing research analysts ratings.

Shouting "I have a massive conflict of interest" at the top of my lungs does not negate the fact that I should not be trusted.

No, but it makes it clear to what might be an otherwise unaware reader that that's the case, which is the whole point.

Also, even if I don't trust you, your research paper might still be informative.

I thought it was an ancient quandry, but it appears the quintessential description was only penned in 1954

https://en.wikipedia.org/wiki/The_Scorpion_and_the_Frog

I would say more similar to the farmer and the viper. There's only one party that's getting the bad end of the deal.

https://en.m.wikipedia.org/wiki/The_Farmer_and_the_Viper

Probably a reference to this: http://fortune.com/2016/04/11/goldman-sachs-doj-settlement/

> It would be unethical if the people who published the research note even knew anything about the offering.

Whether something is unethical is not evidence for or against something happening, it just informs your opinion on whether it happened. Given Goldman's past behavior, I wouldn't let it inform my opinion too much in the direction that they worked in an ethical manner.

Sadly, humans are very good at rationalizing their unethical. The rule of thumb seems to be that whenever there's something unethical but profitable (in terms of money or power), absent any non-moral kind of stopping force (like risk of getting caught and jailed, or social ostracism), a lot of people will be doing that unethical thing. You don't have to go further than to your local grocery store to notice that.

> Sadly, humans are very good at rationalizing their unethical.

Humans are also very good on disagreeing on a fundamental level about what is and isn't unethical in general, before even considering rationalizing their own behavior.

That's true, but sometimes that disagreement also stems from one or both parties rationalizing ;). Like a lot of people who hate being lied to, but have absolutely no resistance from lying to others, and would defend their behaviour if you said to them that lying to people is generally unethical.

But my point is, ethics is not a very strong thing, and alone it doesn't stand much chance against free money lying on the table.

(What I think people miss is that moral behaviour has to be actively maintained in people, otherwise it slowly erodes. This concept goes against the zeitgeist of contemporary western societies though, because it implies there is a standard to hold oneself to.)

> This concept goes against the zeitgeist of contemporary western societies though, because it implies there is a standard to hold oneself to.

The zeitgeist of modern western societies very strongly holds that there is a standard to hold oneself to (it rejects some elements that used to be commonly held to be part of the consensus standard, and adds some that were not, and people who still hold to the rejected elements often portray the new reality as "no standard", when its really just that the dominant standard is now different from their preferences.)

That's the theory. However, that wall doesn't really exist in practice at any bank that provides both equity research services and investment banking services. The entire reason for offering both services is the comflict of interest. "No conflict, no interest".

source: I used to be an analyst in the equity research department at a broker dealer.

It's been at least, what, 8 years since Goldman Sachs was involved in any sort of financial crisis involving malfeasance. And for a 147 year old company, 8 years is a really long time.

I mean, come on. How would you even think they might be doing something unethical at this point?

"It's been at least, what, 8 years since Goldman Sachs was [caught] in any sort of financial crisis involving malfeasance."

FTFY

But that's false. It hasn't been 8 years since Goldman has been caught.

Here's one from 2014 where the research division promised favorable research coverage in exchange for investment banking business:

http://www.usatoday.com/story/money/markets/2014/12/11/finra...

Here's one from 2011 where they promised to stop having "huddles" with some of their clients where they exchanged insider information:

http://www.reuters.com/article/us-goldmansachs-huddles-idUST...

Here's 2015, where one of their associates used his contacts at the Fed Reserve (where he worked for 7 years right before coming to goldman) to gain confidential regulatory info:

http://www.forbes.com/sites/antoinegara/2015/10/28/goldman-s...

Again 2015, when they got caught transmitting incorrect and incomplete data on 1/5th of their trades to FINRA (who monitors their activity to watch for violations of federal rules and regs):

http://www.bloomberg.com/news/articles/2015-07-27/goldman-fi...

Really.. just type goldman fine {year} into google. There's a lot of it.

You're joking, right? (I'm seriously asking.)

Poe's law in action.

I'm old enough to know better. I have no excuse.

(strictly speaking, I'm being bitterly sarcastic)

Isn't the rule in the us the "appearance of conflict of interest", which is even stronger than actual actual collusion?

It is for judges, and I think for government officials in general, but not in the private sector as far as I know.

Who actually audits that? Is there proof?

Better firewall would be not even to exist within the same company.

Ya, maintaining the Chinese wall between research and investment banking is a pretty central function of compliance and is regularly audited by the SEC.

The last few decades demonstrate the SEC is much closer to a rubber stamp for bad behavior than a meaningful entity.

What do Chinese have to do with the SEC?

Answers are more helpful than downmods.

From Wikipedia[0]:

> Chinese wall is a business term describing an information barrier within an organization that was erected to prevent exchanges or communication that could lead to conflicts of interest. For example, a Chinese wall may be erected to separate and isolate people who make investments from those who are privy to confidential information that could influence the investment decisions. Firms are generally required by law to safeguard insider information and ensure that improper trading does not occur.

...

> The origin of the phrase is the Great Wall of China.

[0] https://en.wikipedia.org/wiki/Chinese_wall

Yeah, I didn't see anything about SEC in there.

That page also quotes a California Superior Court opinion that found the term was a "piece of legal flotsam which should be emphatically abandoned". The same opinion also found:

> The origin of the use of "Chinese Wall" in the context of confidentiality is unclear. Evidently, the term was casually coined in some appellate opinion, then picked up and used without question or explanation by courts and commentators.

Can you point to an SEC regulation, or other law, that refers to a Chinese Wall? Like, is there a more specific, technical definition? Wikipedia refers to Chinese wall departments in companies; do you know where to find more information about them? Perhaps links to their enforcement and compliance documents?

You're taking that quote WAY out of context. That was an ethnic-Chinese judge criticizing the specific phrase, and preferring that "ethics wall" be used instead.

'He maintained that the "continued use of the term would be insensitive to the ethnic identity of the many persons of Chinese descent"'

The article mentions, but does not specifically name, regulations implemented after the 1929 stock crash; it also specifically names Title V of the Sarbanes-Oxley Act of 2002. The SEC is responsible for the enforcing the provisions of the latter.

The damning part is this:

> then picked up and used without question or explanation by courts and commentators

This indicates (and was also said) that the term has no lawful basis; it is industry cargo cultism that had been copied around without basis for years.

It is an informal term that refers to very real regulatory requirements.

I'm having trouble visualizing such a wall. Is a wall referenced? Or is just a metaphor for some vague rules that may or may not be followed? Is there a turnkey fire/Chinese wall product on the market?

it works just like a industrial grade router firewall - the router is connected to a gas main, which directs a stream of gas over the back the of router where the rj45s go into, and a flame continuously burns any nasty hackers attempting to hack into your system.

home router systems don't have such a feature.

edit: matt levine used to work at goldman and he posted a piece that has a description of how goldman's multiple chinese wall systems works:

> Nor will [the research analysts] get any hearty back-slaps and high-fives from the bankers, because any banker who walked onto a research floor would be vaporized by powerful lasers long before he could raise his hand for a high-five.

> Remember, bankers can't just call up analysts. Their phones would explode.

https://www.bloomberg.com/view/articles/2016-05-19/goldman-p...

OK, so what I gathered from that article is that it is super illegal for researchers to talk to bankers. So much so that they cannot call or email each other over official company channels, but if they do want to talk, they can just step outside the office and use their cell phones.

The wall sounds as effective as LIBOR's blind auctions.

yup. obviously there are limitations. how do you even plan to 100% restrict that information? i guess you can lock up the research analysts and bankers in monitored cells after work...

Generally, the rules and regulations that apply to the relationship between the Research and Investment Banking departments of a firm include:

- FINRA1 Conduct Rule 2711;

- NYSE Rule 472;

- SEC Regulation AC (Analyst Certification);

- SEC Rules 137, 138, and 139 under the Securities Act of 1933.

The Global Settlement of 2002

The Global Research Analyst Settlement (“Global Settlement”) is an enforcement agreement first announced in December 2002 and finalized on April 28, 2003, among the SEC, NASD (now FINRA), the NYSE, the New York State Attorney General and ten of the then-largest investment banking firms in the United States (the “Settling Firms”, the big 8 US banks plus UBS and Credit Suisse). The Global Settlement addressed issues related to conflicts of interest between the Research and Investment Banking departments these firms that became apparent during the “dot com” boom and then bust of the late 1990s and early 2000s.

As part of the Global Settlement, the Settling Firms agreed to several rules designed to prevent abuse stemming from pressure by investment bankers research analysts to provide favorable coverage specific issuers or securities. The Settling Firms were required to separate their Investment Banking and Research departments from each other both physically and with information "firewalls". Additionally, the budget allocation for Research was to be independent of Investment Banking. Research analysts were also prohibited from attending pitches and road shows with investment bankers during the advertising and promotion of initial public offerings (IPOs). Finally, research analysts’ previously issued ratings about issuers had to be disclosed and made available.

In addition to these regulatory actions, each Settling Firm was enjoined from violating the statutes and rules that it was alleged to have violated. The Settling Firms were also required to pay fines to their investors, fund investor education and pay for independent third-party market research. The total fine paid by the Settling Firms was approximately $1.435 billion, of which $387.5 million was restitution to harmed investors. The Global Settlement was amended in March 2010.

Sarbanes-Oxley

The Sarbanes-Oxley Act of 2002 required the SEC to address conflicts of interest involving research analysts and investment bankers. In response to Sarbanes-Oxley, the NASD and the NYSE established rules and safeguards to separate research analysts from the review, pressure and oversight of investment banking personnel. These rules are intended to ensure the integrity of research, and to protect investors from being misled as a result of a failure to disclose potential conflicts of interest.

Exactly.

https://en.m.wikipedia.org/wiki/Glass%E2%80%93Steagall_Legis...

The GS audit department, of course. They are also firewalled.

> Who actually audits that? Is there proof?

ISO 9001 requires that there's a document stating "persons from group A do not talk to persons from group B". Auditors will: a) check that said document exists b) maybe, maybe (if the auditor is really, really thorough) check whether a random person of group A or group B knows about this document

That's the extent of typical auditing: assuring that a process is defined and cursory testing whether people actually know about a process and its definition. In no way does any auditing assure that the process is in any way actually followed in practice.

"Firewalled off" meaning what?

Is it an easily discoverable crime if they breach that firewall?

This sort of thing brings LIBOR to mind for me ...

/naive scepticism

Oh that's good. I feel safe knowing that investment bankers are highly scrupulous and would never mention anything in the halls or in the lunchroom that might compromise their integrity.

Backroom meetings over cigars and a game of poker are so old school. Todays rage is just chatting:

http://qz.com/246325/goldman-sachs-aims-to-end-the-era-of-ho...

if u cud see ur way to a small drop there might be a steak in it for ya

We’re just not, we’re not allowed to have those conversations on [instant messages]

The upside to GS for Tesla to issue stock 3% higher is pretty minuscule, if anything (GS probably priced their take at a 20 day trailing average price, or whatever). The downside is enormous, and compliance and the SEC are crawling over the place. Plus, the issuance is going to take place at whatever price investors think the stock is worth. If investors think there's a big conflict of interest, they'll price that in.

> the SEC

Hahaha, that's a good one! As though investment banks are afraid of regulators[0].

[0] http://www.thisamericanlife.org/radio-archives/episode/536/t...

> The downside is enormous

Like what, exactly? I mean, it's not like they'd have to pay a massive fine or go to jail.

correl(smoke, fire);

...in our post-prejudicial world.

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