Chris Whalen of Institutional Risk Analytics talks about how the shift in power from I-banking to trading at firms like Goldman has invariably led to conflicts of interest where clients do not come first, something I first broached last summer in "More on why big capital markets players are unmanageable".
Back when Wall Street was run by partnerships, there was a bulge bracket of firms whose names came fist on any prospectus for bond or equity offerings. This group consisted of Goldman Sachs, Morgan Stanley, Lehman Brothers, Dillon Read, and First Boston. Names not on that list were Salomon Brothers (too much trading), Merrill Lynch (too much retail client focus), and Drexel Burnham (not classy enough). Clearly, the hierarchy was white shoe Investment Bankers first, knuckle dragging traders and middle brow retail shops last.
This all changed, starting in the 1980s. There are a number of factors why, but the change in focus brought Salomon, Merrill and Drexel into the big leagues. As time went on trading became more and more dominant.
The result has been an increase in both conflicts of interest and in proprietary trading i.e. trading for one’s own account. You can see the Abacus scandal through this lens. Nevertheless, Whalen is sceptical that the SEC will win its case against Goldman. For now, though the floodgates have opened. Anything is possible – against any firm now. As Simon Johnson said in the breakfast I attended this morning, "The Goldman case is a game-changer."