How Goldman Sachs makes itself look as bad as people think it is

Well, here you go. 

On Wednesday, before the stock market opened in New York, Goldman Sachs analyst Patrick Archambault upgraded shares of Tesla. Archambault put a “Buy” rating and a $250 per share price target on the stock due to what he sees as the market’s failure to “fully [capture] the company’s disruptive potential.”

On Wednesday, after the market closed in New York, Tesla said it would sell $2 billion worth of stock, $1.4 billion of which would be issued by the company.

(Tesla CEO Elon Musk would sell $600 million worth of stock to meet a tax obligation related to his buying even more Tesla stock. It’s complicated. You can read about that here.)

Running the book for that new stock offering? Morgan Stanley and… Goldman Sachs.

Now, if you, believe that banks — and specifically Goldman — are bad actors, this sort of deal makes sense. You might, in this scenario, say “Well, of course: Goldman says nice things about Tesla and then Tesla does a nice thing for Goldman.”

This would, however, be a breach of what the banks call a “Chinese Wall,” or a separation of various divisions that could come into conflict one another.

Research and investment banking are examples of divisions that could create a conflict of interest and between which there exists said wall — meaning that research analysts don’t know who investment banks are doing deals with and investment banks don’t know what analysts think of companies outside of published research.

In an email to Business Insider, Goldman Sachs said: “Our Research is independent. We followed all of our standard policies and procedures with respect to our research publication [on Wednesday].”

It seems unlikely that a coordinated breach happened here. That would be illegal and, while I’m not a criminal or a lawyer, it would seem that the point of breaking the law is not to get caught.

But here’s what this looks like to many:

The stock upgrade is a detailed argument for why you, the investors, should buy the shares. As a result, investors buy.

This report is delivered just as Goldman’s sales force is about to hit the phones to push $1.4 billion of those very shares for a nice fat fee for Goldman and a dilutive hit to the shareholders.

So then there are investors who, based on Archambault’s note, bought the shares in the morning only to learn by that afternoon that Goldman would have a hand in diluting their newly acquired ownership stake.

And the popular view says Goldman knew this was going to happen the whole time.

(There’s an additional potentially uglier mess if you also think Goldman clients were told by Goldman sales-trader types not to buy the stock on the upgrade: what did they know, and so on.)

But analysts aren’t really the problem here

A big problem here is that Goldman can’t save itself from itself.

Publishing a positive opinion on a company Goldman was about to do investment banking business with — in order to secure more fees from said business — is a very public hill to die on.

It’s a little too obvious. You will get caught. (The whole of Finance Twitter had this figured out in minutes.) And again, not a criminal, not a lawyer, but this seems very much in tension with the goals one seeks to achieve when they break the law. Namely: get away with it.

For this to be such a flagrant and clear breach of the Chinese Wall inside Goldman you’d have to think the firm really is that stupid, or regulators are that inept, or you are that smart. Which you can certainly do. Go ahead. I don’t. Call me naïve.

The question that interests me is why does everything have to look so bad?

Like, it doesn’t take much to connect the dots here, spin the story that the markets are corrupt and we, the public, are all being taken for a ride by Wall Street.

But there’s also seemingly no great way Goldman could’ve gotten around this issue. The firm can’t have some sort of compliance middle-man stop the publishing of Archambault’s note without the Chinese Wall effectively coming down.

Here’s the conversation you can’t have:

“Patrick, you can’t publish that note upgrading Tesla until after the market close on Wednesday.”


“You just can’t.”

Obviously, at this point, Archambault would know something is up, and considering everyone knew Tesla was going to tap the capital markets to raise cash — Elon Musk said as much on the company’s most recent earnings call — Archambault would know it was this thing.

And since his note deals extensively with Tesla’s likely capital needs going forward — Archambault estimated Tesla needed to raise $1 billion, about $400 million less than the company tapped the market for — the whole piece of work is compromised.

But I guess to my mind this all just seems like something that ought to be avoided, right?

We’re about five years past Occupy Wall Street and almost eight years past the collapse of Lehman Brothers. Wall Street, however, is still a galvanizing boogeyman for many politicians, among them two of the three remaining candidates for president. 

In this environment, then, it seems there should be a way for everyone — Goldman, basically — to avoid looking so brazen. The mechanics of doing that without sharing the information this whole Chinese Wall system is meant to keep separated seem challenging. 

And so if the rules — research can’t talk to investment bankers and compliance can’t really tip the hands of either group to one without running afoul of said rules — don’t allow Goldman to save itself from itself; if Goldman can’t prevent the embarrassment of having to say that it was something like luck that made the bank’s analysts upgrade a stock before the bank’s bankers did business with that company, then you’re probably never going to win anyway. 

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