If you are interested in knowing just how market making and proprietary trading are differentiated in Goldman Sachs deals, you may want to read ProPublica's Jesse Eisinger's piece called Trading for the Client? Or Winning on Its Own? which examines a Goldman Sachs trade called "Celf Partnership."
The Epicurean Dealmaker blog carries the examination of the differences further and shows that market making and proprietary trading actually lie on a continuum and then explains in detail how they differ.The excerpt below from the article called A Client Is Not a Counterparty sums up The Epicurean Dealmaker's observations of Eisinger's piece:
Enough with the history lecture. The major point you should take away from the dissertation above is that everything an investment bank normally does in securities markets requires it to put capital at risk. Low-risk, agency type businesses like underwriting and traditional market making lie on the same spectrum as full-blown proprietary trading, if only at different ends. There is no bright line between market making and prop trading, if only because a market maker may unintentionally take securities into inventory for a long time, because no buyer happens to be available, whereas a prop trader may make money by scalping basis points in high speed trading of liquid markets.
But the blurry line between market making and proprietary trading doesn't mean we can't identify proprietary investing—or, more specifically, acting like a principal investor—when we see it. The only time Goldman Sachs acted remotely like an agent in the scenario Jesse Eisinger described above was when it underwrote the original CELF securities offering in 2008. Even then, its client was Goldman Sachs itself, which sold the vast majority of loans underlying CELF to the securitization vehicle as principal. How interested do you think Goldman was in selling those securities to investors for an attractive price? Can you imagine its concerns as underwriter might have been subordinated to its interest as seller in getting the highest price? I can.
In any event, Goldman's actions in 2010 bear absolutely no resemblance to behaving like an agent when it purchased the outstanding CELF securities and liquidated them. It did not behave like a normal market maker, buying securities from one investor and selling them to another. It paid an arm's length price, determined after an auction run by a third party, to the investor it originally sold the AAA rated tranche to. It then triggered the liquidation of the securitization by purchasing a majority stake in its equity. With respect to the seller of the AAA tranche, it acted as a pure trading counterparty. A principal.
Therefore, Goldman's attempt to wrap its behavior in the holy shroud of client service:"Our client decided to sell its investment," the firm said in a statement. "It took independent advice and ran a competitive sale process. We offered the highest price. This is a good example of helping a client achieve its objective, and underscores the critical importance banks play in using their capital to facilitate transactions on behalf of clients."is nothing more than a patently disingenuous dodge.
By the same reasoning, my local pharmacist becomes my client every time I buy Preparation H to soothe the ass chapping Goldman Sachs gives me when they spout such pure, unadulterated horseshit.
I don't think so.
Read the full article here