For the smartest kid on the playground, it has been a tough few months. First news swirled of Goldman’s clever idea to essentially bet against both the market it created and the investors it had enlisted. All in the name of bringing “liquidity” to the market (so they said) and mega profits to the Street’s richest firm for yet another “financial innovation”. However, the new, “we’re tougher than ever” SEC would have none of it and a settlement was reached costing Goldman $550 million (nothing that will rock this giant, but a half a billion dollars is still a lot of money). On the heels of the settlement, ACA, a private Wall Street insurer, initiated a lawsuit over the same issue.
Perhaps related, perhaps not, Goldman made serious concessions to its critics by divulging the source of some of its revenue. Specifically, Goldman has implemented new procedures to: (1) disclose the source of its profits; (2) increase transparency; (3) separate and clearly define the responsibilities of traders and investment bankers; and (4) publish a simplified balance sheet in addition to the balance sheet required under minimum accounting standards. As part of the change Goldman will distinguish profits it earns investing on its own behalf from those earned for investors on investor accounts. The hope is that this will dispel theories that the firm is making improper trades (or less gently “betting against it’s own customers”).
While the smart kid who seemed to run the schoolyard took a punch on the nose, he may have just learned his lesson. The extent to which Goldman truly works towards transparency remains to be seen, but this initial good faith offering is a step in the right direction. We can only hope that in addition to being a market leader in profits, they also want to be a market leader in the area of reform. If so, others firms on the playground, large and small might just follow.