Goldman Sachs’s second-in-command on Tuesday warned that markets would stop functioning if Congress forced banks to look after their clients’ interests when operating as “market makers” standing between buyers and sellers of securities.
The issue is the focus of a lobbying effort in Congress with the biggest US banks warning that fiduciary requirements in a Senate regulation bill would cut off access to swaps markets for endowments at universities such as Harvard and Yale and municipalities across the country.
During his first presentation for investors, Gary Cohn, Goldman’s president and operating chief, said: “Markets would not work, if market makers were a fiduciary.”
“What would a market maker do if he had a buyer and seller simultaneously approach him? How would he act as a fiduciary?” Mr Cohn asked.
“He can’t be a fiduciary to one and not the other. He can’t be a fiduciary to both.”
Goldman’s duty to its clients is at the centre of a civil fraud case brought by the US Securities and Exchange Commission against the company. The SEC accused Goldman and one of its bankers of misleading investors about the role a hedge fund played in selecting the mortgage assets referenced in a security known as a collateralised debt obligation. Goldman and the banker deny the charges.
The case has fuelled attempts to introduce fiduciary duty rules into financial regulation legislation that is due to come to a final vote in the US Senate in the next two weeks.
Mr Cohn yesterday attempted to rebuff accusations that Goldman puts its interests ahead of its clients, arguing that the bank’s profits were tied to success of customers.
“Clients are the heart of everything we do at Goldman,” he said. “Client needs drive our strategy . . . client trust is paramount for our ongoing success.”
Other swaps dealers have joined Goldman in lobbying Congress to remove a “special rule” in the Senate bill that thrusts a fiduciary duty on any dealer that enters into a swap with a pension fund or government agency, state or municipality.
The banks warn they will simply have to stop trading with clients covered by the rules if they become law. One industry lawyer said there was “an open question over Fannie Mae and Freddie Mac”, given that the mortgage guarantors, huge users of swaps, were quasi-government entities.