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How Goldman Trades on Client Info

The Goldman Sachs booth on the floor of the New York Stock Exchange
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The Goldman Sachs booth on the floor of the New York Stock Exchange

Goldman is often accused of being “ruthlessly self-serving” in its dealing with clients. Goldman, of course, maintains that it is still dedicated to serving its clients.

Unfortunately for Goldman, the report from the Senate investigations committee includes crystal clear evidence of its traders being, well, ruthlessly self-serving.

In William Cohan’s new book about Goldman —“Money and Power”—a “private equity investor” accuses Goldman of using information gathered from clients to enhance the firm’s own trading.

“They view information gathered from their client businesses as free for them to trade on ... it’s as simple as that. If they are in a client situation, working on a deal, and they’re learning everything there is to know about that business, they take all that information, pass it up through their organization, and use that information to trade against the client, against other clients, et cetera, et cetera.”

(Hat tip: Janet Maslin’s NYT review of the book, which adds that the investor “stops short of labeling this as insider trading, but only barely, saying, ‘I don’t understand how that’s legal.’”)

The Senate committee’s report quotes an internal self-evaluation from Goldman trader Deeb Salem. The trader reveals that he was doing exactly what Cohan’s source indicated.

“We were very aggressive with pricing and only shared risk [short positions] with smart guys if they gave us insight on names to go short or go long in return,” Salem wrote in 2007.

In other words, Goldman was only allowing clients to go short if the clients would hand over market intelligence about the mortgage market.

Someone should call John Paulson, who was the biggest short in the market and a Goldman client, and ask him how he feels about this.

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  • Jeff Cox is finance editor for CNBC.com.

  • Lawrence Develingne

    Lawrence Delevingne is the ‘Big Money’ enterprise reporter for CNBC.com and NetNet.

  • Stephanie Landsman is one of the producers of "Fast Money."

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