March 16, 2012
Frank Partnoy on Greg Smith: There are clients and there are clients
Posted by Usha Rodrigues

You may be on spring break or not subscribe to that pink paper from across the pond, and so have missed Frank Partnoy's op-ed today in the Financial Times about Greg Smith.  I'm someone who's never seen the inside of Goldman, or any investment bank, but this rings true for me:

if we pause to think through how Mr Smith’s accusations matter to future policy, we might address a crucial, open question at the centre of the Goldman controversy: what does it mean to be a client?  ...there are clients, and there are clients.

....Both Mr Smith and Goldman stretch the word to cover not only true client relationships in which the bank owes a fiduciary duty as an adviser but also pseudo client relationships in which the company is a market maker, trading with counterparties at arm’s length. Goldman’s “muppets” are pseudo clients at most – fellow gamblers around a poker table. Goldman will ensure that the rules of the game are accurately described – the financial equivalent of checking to be sure there are 52 cards in the deck. But it is not obliged to act in a disadvantaged counterparty’s best interests, any more than a savvy poker player is obliged to show a poor player his good cards.

I can see principled arguments for going either direction.  For 1) distinguishing the fiduciary relationship where duties are owed from the every-man-for-himself counterparty relationship, where bare honesty is all that's required.  Or for 2) saying counterparties deserve fiduciary protection as well, meriting the punctilios of an honor the most sensitive, no way no how is "accurate disclosure" the sum total of the duty owed.  Partnoy's incisive point is well taken, it seems to me: we need to be clear about whom we're speaking when we talk about clients.  

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