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Verret in Wall Street Journal: Bill Hamstrings Investment Bankers

Goldman Sachs's problems have contributed to lawmakers' proposals to ban investment banks from betting against their customers, and such legislation is of concern to Professor J.W. Verret.

In a Wall Street Journal interview, Verret said, "This bill really hamstrings investment banks. It's putting them between a rock and a hard place."

The matter to which Verret refers is a proposed amendment to the financial overhaul bill currently under debate in the Senate. Sen. Carl Levin (D-Mich.) and co-sponsor Sen. Jeff Merkley (D-Ore.) propose that a type of transaction they believe is abusive should be barred, rather than simply requiring insertion of additional legal language in offering documents to protect investors.

Verret testified before a Senate subcommittee on Capitol Hill last week on bankers' duties to clients.

Levin Aims to Ban Banks From Betting Against Customers, The Wall Street Journal, May 9, 2010. By John D. McKinnon.

Excerpt:

"In a statement to The Wall Street Journal, Sen. Carl Levin (D., Mich.) said he is drafting legislation to prevent conflicts of interest by 'prohibiting companies from taking the opposite side of the deal for their own account,' at least when they are marketing investments they have created themselves.

"Mr. Levin and his co-sponsor, Sen. Jeff Merkley (D., Ore.), are aiming to propose an amendment as soon as Monday to the financial-overhaul bill being debated in the Senate.

"At a Senate hearing last month in which senators grilled Goldman executives, Mr. Levin focused much of his scrutiny on a handful of deals where he said that Goldman was both constructing subprime-mortgage securities and effectively betting they would fall in value.

"Those deals, which carried names like Timberwolf and Hudson, are somewhat different from a 2007 transaction called Abacus that is the subject of civil-fraud allegations by the Securities and Exchange Commission. In Abacus, a hedge fund, rather than Goldman itself, took the 'short' side of the transaction, betting the mortgages would decline.

"In all of the transactions, a fundamental issue is how much obligation Goldman had—or should have had—to protect its customers' interests. At the Senate hearing, Goldman witnesses frequently spoke in general terms of the firm's role as a 'market maker,' someone who matches buyers and sellers and can take positions on his own. A market maker's duty to customers is limited.

"Mr. Levin says that despite the firm's rhetoric, Goldman's role in the deals under scrutiny was as a securities underwriter or 'placement agent,' which carries a broader obligation to disclose details about the product. Goldman Sachs doesn't disagree that it was a placement agent in those transactions."

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