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The big surprise here isn't that Tesla was doing an offering - it was Goldman did a huge research note 24 hours before the offering while actually participating
by jboydyhacker 10y ago
The big surprise here isn't that Tesla was doing an offering - it was Goldman did a huge research note 24 hours before the offering while actually participating in said offering.
Super bad form and just goes to show the community- don't trust investment bankers. Such bad form.
- nathancahill 10y agoI feel for the grunts that worked through the night writing that note. They'll probably get a nice bonus though.
- asbromberg 10y agoIsn't this exactly what's supposed to happen at big banks? I thought we wanted the equity research department to be separate and not conflicted with capital markets?
- xadhominemx 10y agoThe equity research department is firewalled off from the deal teams doing the offering. It would be unethical if the people who published the research note even knew anything about the offering.
- kbenson 10y ago> It would be unethical if the people who published the research note even knew anything about the offering. Whether something is unethical is not evidence for or against something happening, it just informs your opinion on whether it happened. Given Goldman's past behavior, I wouldn't let it inform my opinion too much in the direction that they worked in an ethical manner.
- TeMPOraL 10y agoSadly, humans are very good at rationalizing their unethical. The rule of thumb seems to be that whenever there's something unethical but profitable (in terms of money or power), absent any non-moral kind of stopping force (like risk of getting caught and jailed, or social ostracism), a lot of people will be doing that unethical thing. You don't have to go further than to your local grocery store to notice that.
- dragonwriter 10y ago> Sadly, humans are very good at rationalizing their unethical. Humans are also very good on disagreeing on a fundamental level about what is and isn't unethical in general, before even considering rationalizing their own behavior.
- TeMPOraL 10y agoThat's true, but sometimes that disagreement also stems from one or both parties rationalizing ;). Like a lot of people who hate being lied to, but have absolutely no resistance from lying to others, and would defend their behaviour if you said to them that lying to people is generally unethical. But my point is, ethics is not a very strong thing, and alone it doesn't stand much chance against free money lying on the table. (What I think people miss is that moral behaviour has to be actively maintained in people, otherwise it slowly erodes. This concept goes against the zeitgeist of contemporary western societies though, because it implies there is a standard to hold oneself to.)
- dragonwriter 10y ago> This concept goes against the zeitgeist of contemporary western societies though, because it implies there is a standard to hold oneself to. The zeitgeist of modern western societies very strongly holds that there is a standard to hold oneself to (it rejects some elements that used to be commonly held to be part of the consensus standard, and adds some that were not, and people who still hold to the rejected elements often portray the new reality as "no standard", when its really just that the dominant standard is now different from their preferences.)
- jandrese 10y agoOh that's good. I feel safe knowing that investment bankers are highly scrupulous and would never mention anything in the halls or in the lunchroom that might compromise their integrity.
- revelation 10y agoBackroom meetings over cigars and a game of poker are so old school. Todays rage is just chatting: http://qz.com/246325/goldman-sachs-aims-to-end-the-era-of-horrifying-trader-chat-transcripts/ http://qz.com/246325/goldman-sachs-aims-to-end-the-era-of-ho... if u cud see ur way to a small drop there might be a steak in it for ya We’re just not, we’re not allowed to have those conversations on [instant messages]
- xadhominemx 10y agoThe upside to GS for Tesla to issue stock 3% higher is pretty minuscule, if anything (GS probably priced their take at a 20 day trailing average price, or whatever). The downside is enormous, and compliance and the SEC are crawling over the place. Plus, the issuance is going to take place at whatever price investors think the stock is worth. If investors think there's a big conflict of interest, they'll price that in.
- ForHackernews 10y ago> the SEC Hahaha, that's a good one! As though investment banks are afraid of regulators[0]. [0] http://www.thisamericanlife.org/radio-archives/episode/536/the-secret-recordings-of-carmen-segarra http://www.thisamericanlife.org/radio-archives/episode/536/t...
- tomp 10y ago> The downside is enormous Like what, exactly? I mean, it's not like they'd have to pay a massive fine or go to jail.
- kolbe 10y agocorrel(smoke, fire); 0 ...in our post-prejudicial world.
- ck2 10y agoWho actually audits that? Is there proof? Better firewall would be not even to exist within the same company.
- xadhominemx 10y agoYa, maintaining the Chinese wall between research and investment banking is a pretty central function of compliance and is regularly audited by the SEC.
- Retric 10y agoThe last few decades demonstrate the SEC is much closer to a rubber stamp for bad behavior than a meaningful entity.
- jsprogrammer 10y agoWhat do Chinese have to do with the SEC? Answers are more helpful than downmods.
- _asummers 10y agoFrom Wikipedia[0]: > Chinese wall is a business term describing an information barrier within an organization that was erected to prevent exchanges or communication that could lead to conflicts of interest. For example, a Chinese wall may be erected to separate and isolate people who make investments from those who are privy to confidential information that could influence the investment decisions. Firms are generally required by law to safeguard insider information and ensure that improper trading does not occur. ... > The origin of the phrase is the Great Wall of China. [0] https://en.wikipedia.org/wiki/Chinese_wall https://en.wikipedia.org/wiki/Chinese_wall
- jsprogrammer 10y agoYeah, I didn't see anything about SEC in there. That page also quotes a California Superior Court opinion that found the term was a "piece of legal flotsam which should be emphatically abandoned". The same opinion also found: > The origin of the use of "Chinese Wall" in the context of confidentiality is unclear. Evidently, the term was casually coined in some appellate opinion, then picked up and used without question or explanation by courts and commentators. Can you point to an SEC regulation, or other law, that refers to a Chinese Wall? Like, is there a more specific, technical definition? Wikipedia refers to Chinese wall departments in companies; do you know where to find more information about them? Perhaps links to their enforcement and compliance documents?
- hristov 10y agoThat is true. Also, Goldman Sachs is so experienced with conflicts of interest that they are just very good at handling them. You see Goldman Sachs experiences so many conflicts of interest all the time that they have obtained expertise in handling these conflicts that people like me and you cannot even imagine. The modern Goldman banker is a unique creature with a conscience that is so complex and evolved that he can earnestly and passionately defend two positions that would seem to me and you completely opposite. ... Ok I have stopped laughing now and I am starting to get angry so I might as well get back to work ...
- deleted 10y ago[deleted]
- cloudjacker 10y agobeautiful.
- philrapo 10y agoYou are conflating the investment banker and the equity research analyst, which have legally mandated information sharing firewalls. Also this potential conflict is clearly and openly disclosed, e.g. "This company publishes research and also seeks to do investment banking business with Tesla". Further, Goldman conducted a secondary share offering for Tesla as recently as summer 2015, so it was exceedingly obvious to anyone who makes investment decisions based on the research that this conflict exists. I have worked at several wall street firms and also worked for firms in silicon valley, and I frankly noticed more numerous and blatant conflict of interest situations in silicon valley. EDIT/UPDATE: Prominently displayed in large font on page 1 of the Goldman research report on Tesla: "Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision."
- lesdeuxmagots 10y agoNo contest to the claim that there are conflicts of interests in silicon valley, but the firewall / chinese wall between research and banking groups is pretty spotty, despite all the formal processes to try to maintain it. Personally saw tons of sketchy things going on with MDs on IB side influencing research analysts ratings.
- nraynaud 10y agoIsn't the rule in the us the "appearance of conflict of interest", which is even stronger than actual actual collusion?
- azernik 10y agoIt is for judges, and I think for government officials in general, but not in the private sector as far as I know.
- hinkley 10y agoIt's been at least, what, 8 years since Goldman Sachs was involved in any sort of financial crisis involving malfeasance. And for a 147 year old company, 8 years is a really long time. I mean, come on. How would you even think they might be doing something unethical at this point?
- malandrew 10y ago"It's been at least, what, 8 years since Goldman Sachs was [caught] in any sort of financial crisis involving malfeasance." FTFY
- rgbrenner 10y agoBut that's false. It hasn't been 8 years since Goldman has been caught. Here's one from 2014 where the research division promised favorable research coverage in exchange for investment banking business: http://www.usatoday.com/story/money/markets/2014/12/11/finra-wallstreet-ipos-bansk-fines-/20249937/ http://www.usatoday.com/story/money/markets/2014/12/11/finra... Here's one from 2011 where they promised to stop having "huddles" with some of their clients where they exchanged insider information: http://www.reuters.com/article/us-goldmansachs-huddles-idUSTRE75840Z20110609 http://www.reuters.com/article/us-goldmansachs-huddles-idUST... Here's 2015, where one of their associates used his contacts at the Fed Reserve (where he worked for 7 years right before coming to goldman) to gain confidential regulatory info: http://www.forbes.com/sites/antoinegara/2015/10/28/goldman-sachs-to-pay-50-million-fine-admit-failure-to-supervise-over-fed-breach/#56865cd543c3 http://www.forbes.com/sites/antoinegara/2015/10/28/goldman-s... Again 2015, when they got caught transmitting incorrect and incomplete data on 1/5th of their trades to FINRA (who monitors their activity to watch for violations of federal rules and regs): http://www.bloomberg.com/news/articles/2015-07-27/goldman-fined-1-8-million-by-finra-over-inaccurate-trading-data http://www.bloomberg.com/news/articles/2015-07-27/goldman-fi... Really.. just type goldman fine {year} into google. There's a lot of it.
- sgnelson 10y agoYou're joking, right? (I'm seriously asking.)
- deleted 10y ago[deleted]
- malandrew 10y agoThat's the theory. However, that wall doesn't really exist in practice at any bank that provides both equity research services and investment banking services. The entire reason for offering both services is the comflict of interest. "No conflict, no interest". source: I used to be an analyst in the equity research department at a broker dealer.
- deleted 10y ago[deleted]
- pbhjpbhj 10y ago"Firewalled off" meaning what? Is it an easily discoverable crime if they breach that firewall? This sort of thing brings LIBOR to mind for me ... /naive scepticism
- Aelinsaar 10y ago"Investment Bank" are words that should absolutely, when used in tandem, inspire feelings of incredulous contempt.
- jandrese 10y ago"Insider Trading House" was a little too on-the-nose.
- umanwizard 10y agoWhy?
- fosco 10y agowhere? sorry I cannot find this info, can you share your source/article?
- andrewtbham 10y agohttp://www.valuewalk.com/2016/05/goldman-tesla-secondary/ http://www.valuewalk.com/2016/05/goldman-tesla-secondary/
- shostack 10y agoCan you ELI5 what a research note is, and why this is suspicious?
- tomp 10y agoGoldman advised investors to "Buy" Tesla (i.e. their "opinion" is that the stock is a good investment and should increase in price - quotes because of a well-documented positive bias of sell-side analysts) just before underwriting Tesla's offering (i.e. taking fees for successfully selling all new shares).
- bwilliams18 10y agoGoldman Researchers advised investors while Goldman Investment Bankers underwrote a deal. These guys (and gals) aren't standing around a water cooler chatting about their work with each other for exactly this reason. It's highly unethical, and illegal to share this sort of information before it's public.
- tomp 10y agoYou mean unethical in the same way that Goldman investment advisors were trying to make their clients buy instruments that Goldman traders were desperate to sell during the financial crisis?!
- repler 10y agoOr both departments within Goldman both reached the same conclusion independently: the stock is currently very undervalued. If Tesla sells (heh, and builds) every one of their pre-ordered model 3's, that's over $14b in revenue. The only question is, are they going to be able to do it. If both departments at Goldman think the answer is "YES", then what they have done is absolutely reasonable.
- Shivetya 10y agothe big assumption is that they will deliver the car at a profit.
- rmoriz 10y ago"they're selling at a loss but making it up on volume"
- euyyn 10y agoHow's that possible?
- mangeletti 10y agoEconomies of scale[1]. A simple example is, imagine making pizzas for your neighbors, and it takes you 15 minutes to make dough for 1 pizza, and at a $10/hr wage, that's $2.50 per pizza in dough labor costs. Now, imagine it only takes you 20 minutes to make dough for 5 pizzas. That's $3.33 in dough labor costs for 5 pizzas, or $.66/ea. 1. https://en.m.wikipedia.org/wiki/Economies_of_scale https://en.m.wikipedia.org/wiki/Economies_of_scale
- jacquesm 10y agoYou should read catch-22.
- mangeletti 10y ago
- SilasX 10y agoYou mean 24 hours before the announcement? The offering itself isn't for a while, right?
- TearsInTheRain 10y agoyes but the announcement can move the stock
- forgetsusername 10y agoWhy do you distrust Goldman, but not Tesla? You know that investment banks don't play those games in a vacuum, right? Both parties a guilty.
- neurotech1 10y agoI think its likely that "everyone" following Tesla knew an offering was coming. I'd go as far as thinking its likely Bob Lutz knew the offering was coming soon. GS research could easily have known without illegal backroom whispers.
- jeffwass 10y agoOut of curiosity, what are your thoughts when YC personnel hype the latest batch of startups here on HN shortly before Demo Day?
- deleted 10y ago[deleted]
- mediaman 10y agoTo suggest these are similar (which, to be fair, you are not explicitly claiming) seems to be to not understand the nature of what the banks are doing. In investment banks, as a client you pay the research department for objective research into a security. By preparing research that is intentionally untrue, in order to benefit a deal team, there is a violation of duty from the seller of goods (the equities analyst) to the paying client (money manager). In today's world, that violation of duty is not only moral but legal as well. The equivalent here would be you, as an angel investor, hiring a YC representative as an investment advisor on what companies to invest in, and the YC rep pumping whichever company in the YC program they wanted to get money for, without even disclosing conflicts of interest. That same YC representative giving publicity to the general public ahead of demo-day has no financial conflict of interest at all. I have a hard time seeing what moral (much less legal) duty they have to not publicize their portfolio companies.
- bwilliams18 10y agoThere's an argument about YC reps giving favorable publicity to some but not other companies being unfair signaling, and disadvantaging the companies who are given less hype time. I don't know if I agree with that argument, but I think it's a valid point to discuss. Furthermore, YC partners are locked out from investing in YC companies for a period of time, for a similar reason, so the argument gets stronger.
- bjacokes 10y agoSecondary offerings don't significantly affect the stock price and research notes don't make the bank much money, so the outrage is a bit misplaced. If a bank wanted to make money by breaking the rules, they'd have M&A talk with their prop trading desk.
- arthurcolle 10y agoBanks no longer have prop trading desks as a result of the Volcker rule.
- tim333 10y agoI'm unclear why that's bad form. Pumping a stock while you are selling it is bad form. Say it's great and that you intend to offer to buy some seems kind reasonable to me.
- hristov 10y agoThey are selling it. Goldman Sachs is selling the stock on behalf of Tesla.
- an4rchy 10y agoI'm not too familiar with the Research / IB relationship or ethics of it but I'm curious about how this would affect the general market if they did know about it. Do people blindly follow Goldman's research advice and thereby increase the share price and give Goldman a higher commission or something?
- andrewtbham 10y agoi wouldn't say that people blindly follow the research at big investment firms, but they take it seriously. i had invested for years and just used company reports, yahoo finance, motley fool, and media articles. when i invested in tesla i ended up getting morgan stanley's research. i couldn't believe how well done it was. the media and the other resources are a joke in comparison. one of the key things is they have models into the future that project sales and profit and have dcf analysis. if you want to bring down income inequality, you should make a napster for financial research.
- genieyclo 10y ago> you should make a napster for financial research. MarketBrief is sorta this (YC S11)
- philrapo 10y agoProminently displayed in large font on page 1 of the Goldman research report on Tesla: "Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision." (I put this in the reply to a child, but I felt it was relevant enough to reply directly to the parent.)
- ryguytilidie 10y agoDo you think that putting a disclaimer of your sketchy behavior excuses your sketchy behavior?
- hueving 10y agoThat's par for the finance world. They will sell you shit with a smile as long as it pays commission even though they would never touch it (or are even short it).
- monochromatic 10y agoAren't they by definition short any security they're selling you?
- TrickedOut 10y agoNo - when they sell you a security, the assumption is they were long until then (holding it) and then either disposed of their entire long position or disposed part of it (in which case they continue holding it long.) The case where they are selling you something and are SHORT the product is a special case which requires more work usually. The most egregious case was the ABACUS deal (http://www.theworkingeconomy.com/simple-explanations-of-economic-news/a-simple-explanation-of-goldman-sachs-abacus-2007-ac1 http://www.theworkingeconomy.com/simple-explanations-of-econ...) where Goldman was actively short the product and needed a dumb customer to unload the other side (enter Fabulous Fab and his widows orphans: http://www.reuters.com/article/us-goldman-emails-idUSTRE63O26E20100426 http://www.reuters.com/article/us-goldman-emails-idUSTRE63O2...)
- mac01021 10y agoWhy is it bad form to research a company and then decide based on your findings to invest in it? (I am an outsider to the world of finance and clearly I am failing to understand something)
- sib 10y agoAt a simple level, they are researching the company and then publishing their findings to convince others to invest in the company. Generally, the more demand there is for the shares, the more money the investment bank makes for conducting the share offering. So, the research arm has something of a (perceived, at least) motivation to publish research which supports a high level of demand.
- bwilliams18 10y agoGoldman Sachs Research in this instance is a defined term that carries a whole lot more weight than research you or I would do to determine if we should invest in a stock. Analysts are required to genuinely believe what they are saying, or at least aren't allowed to say one thing in public research reports, and another in private. Their research is considered Material Non-Public Information until it is published, and thus cannot share it with anyone in their firm that is outside the research department until they release it to the public.
- fapi1974 10y agoThought this was appropriate: http://fooledbyrandomness.com/equality.pdf http://fooledbyrandomness.com/equality.pdf
- newscasta 10y agohttps://www.bloomberg.com/view/articles/2016-05-19/goldman-picked-a-good-time-to-like-tesla-s-stock https://www.bloomberg.com/view/articles/2016-05-19/goldman-p...