The great Goldman distraction

Goldman Sachs produced a review of its business standards overnight in a response to the post-crisis assaults by regulators, legislators and other critics of its business practices. The external response to the 63-page internal review, with 39 recommendations for change, however, was faint praise at best.

It is one of the perverse aspects of the response to the Wall Street investment banks at the epicentre of the crisis that Goldman, which went into the crisis as the most-admired of the banks, has emerged as the most vilified – largely because it emerged largely unscathed.

The review was the bank's response to the criticism, and the $US550 million fine it paid the Securities and Exchange Commission last year to settle an action against it alleging it had defrauded investors in a complex mortgage-backed security it originated.

While some of the recommendations in the report are anodyne, there is a focus on prioritising the interests of clients, making Goldman's own proprietary activities (including their profitability) more transparent and strengthening its processes for managing conflicts of interest when, given that Goldman is a full service investment bank, its clients interests and its own inevitably collide.

In an implicit acknowledgement that it had placed profit ahead of principle in at least some instances during the boom in sub-prime mortgages that preceded and then triggered the crisis, Goldman will establish a new committee (one of the numerous new committees the review recommends) to oversee the process for approving new products and activities and to "assess the important question of not just can we undertake a given business opportunity, but should we."

It will also shift certain underwriting and origination activities, from its securities division to its financing group – from its traders to its investment bankers – which would appear to be a response to criticism that the traders, driven by short-term incentives rather than client relationships, had come to dominate the activities and culture of the group, to its detriment.

Greater transparency, more training for its staff on issues that could affect the group's reputation and an elevation of client interests, including better focus on the suitability of products for particular types of clients, are the key features of the recommendations.

The review, if its recommendations are executed properly, should result in a more client-focused, probably less profitable and definitely less nimble and more bureaucratic organisation.

Managing conflicts within a modern Wall Street investment bank isn't straightforward, given the complex mix of agency and principal businesses the banks undertake routinely.

Even with the 'Volcker Rule' severely limiting some proprietary trading and investment activities, their roles as market-makers and underwriters in facilitating client activities means there will always be some potential for conflict between its clients' interests and its own.

A much-expanded corporate governance structure and improved disclosure of its own interests and the potential for conflicts might reduce the risk of further embarrassment and legal actions but doesn't alter that fundamental reality of modern investment banking.

Much of the criticism of Goldman and its peers, and indeed Goldman's own response to that criticism, begs an important question.

While it is appropriate after what occurred in the lead-up and in the wake of the crisis to review organisational standards and processes, the client bases of the major investment banks are predominantly large and sophisticated institutions.

The transactions Goldman has been savaged over have revealed a naivete, recklessness and absence of due diligence on the part of supposedly responsible institutions that was as disturbing, if not more, than anything Goldman has been accused of.

The focus on the investment banks has distracted from the failings and the responsibilities of their clients.

The Goldman review, with its myriad of recommendations that amount to an admission of shortcomings by the bank, tends to reinforce the perception that the responsibility for protecting the interests of supposedly sophisticated investors lies largely, if not entirely, with the investment banks and to absolve the institutions from responsibility for their own actions. That's not necessarily a desirable outcome.