Goldman Sachs Group Inc. research analyst Marc Irizarry’s published rating on mutual-fund manager Janus Capital Group Inc. was a lackluster “neutral” in early April 2008. But at an internal meeting that month, the analyst told dozens of Goldman’s traders the stock was likely to head higher, company documents show.
The next day, research-department employees at Goldman called about 50 favored clients of the big securities firm with the same tip, including hedge-fund companies Citadel Investment Group and SAC Capital Advisors, the documents indicate. Readers of Mr. Irizarry’s research didn’t find out he was bullish until his written report was issued six days later, after Janus shares had jumped 5.8%.
More good news for Goldman Sachs, which now has the WSJ taking a bite out of its posterior. Here it is reported that Goldman was handing out tips to favored clients that one of its analysts was about to publish favorable ratings of a mutual fund, giving those clients the opportunity to buy in six days before the analyst’s rating was published.
This is a practice that’s apparently been going on forever. You give an investment bank enough business, they will throw bon mots like this your way. Here’s Jim Cramer, CNBC’s yipping rumor-poodle who is formerly of Goldman and then of course a hedge fund manager in his own right, describing how his wife and partner Karen Backfisch taught him to butter up investment banks with commissions:
How she did it was by gaming Wall Street, trying to anticipate moves of analysts before they were made, and placing big bets on the direction that analysts were going to go. That way, she said, you always had an edge, you never owned anything idly, and you always had an exit strategy
Karen explained to me that the analyst game was a game of sponsorship. Analysts like to get behind stocks and bull them. You have to get in on the ground floor when they start their sponsorship campaign. If Merrill is the sponsor of a stock, it could be good for 5 points. If Goldman sponsored something, it could be good for 10. You want to buy something and flip it-sell it immediately-into the sponsorship. That’s the only sure thing on Wall Street.
When I asked her how we could find out about all of these wonderful things when I was jut a little hedge fund manager, she said one word: ‘commish.’ Commissions, she explained, determined what you are told, what you will know, and how much you can find out. If you do a massive amount of commission business, analysts will return your calls, brokers will work for you, and you will get plenty of ideas to make money, on both a short- and long-term basis Commissions greased everything.
This comes on the same day that the New York Times ran a big story on Sergey Aleynikov, the guy who stole Goldman’s high-frequency trading program.The story is about the use of technology that banks use to make trades in fractions of milliseconds, taking advantage of tiny price discrepancies in the market.
Both of these stories have a common theme. The people who are actively innovating on Wall Street are all involved in the business of gaming the system to take advantage of short-term price swings. The people who invest money for the long-term and stick with their investments are punished in this environment.