Embracing Conflicts – A Bad Business Strategy by Peter J. Solomon

Date: 05-May-2010

Peter J. Solomon         
Chairman                       

Embracing Conflicts – A Bad Business Strategy

Goldman Sachs may or may not be guilty of fraud as alleged by the Securities and Exchange
Commission.  The legal issue centers on whether Goldman had to disclose that a prominent
institutional investor had selected mortgages to be sold to other institutional investors. 
"Disclosure" is the central issue in this case.
There is a much more basic business issue raised by the case; namely, when a firm represents itself
and other parties simultaneously, to whom do they have a fiduciary responsibility?
For most of my 50 years on Wall Street, it was assumed that your firm could only represent one
party in a transaction.  This was not only good business practice but legal advisors cautioned
against conflicts of interest and the courts dealt harshly with a participant who tried to wear two
hats.
As Wall Street firms expanded and moved into proprietary investments, leveraged or not, short and
long-term, debt or equity, departments arose to resolve not only conflicts within the firms but
also conflicts with their clients.  Jargon was created, such as Chinese Walls and Clean Teams, to
camouflage what is dubious behavior – representing competing interests under the same roof – one of
which increasingly is the firm itself. Ambiguity and self-interest have become the standards in the diversified firms, replacing loyalty and trust.

Charlie Ellis, in the updated version of his history of Goldman Sachs, interviewed the current CEO extensively.  Ellis writes:

"The crucial differentiating advantage of Goldman Sachs would be one that outsiders might find
surprising:  Its complex variety of many businesses was sure to have lots of conflicts.  Goldman
Sachs, Blankfein said, should embrace the challenge of those conflicts.  Like market risk, the risk
of conflicts would keep most competitors away – but by engaging actively with clients, Goldman
Sachs would understand these conflicts better and could manage them better".