Goldman Highly Confident in its Chinese Walls, Letter to the Editor, Financial Times by Lucas van Praag

Financial Times (Online) - April 26 2010 03:00 - By Lucas van Praag
© 2010 The Financial Times Limited. All rights reserved

Sir, We were surprised and disappointed that you published an article ("Goldman had two roles in Lloyds deal", April 23) suggesting that our role in last year's capital raising by Lloyds Banking Group highlighted potential conflicts of interest and implied that we sought to take advantage of our position. We would like to make the following points.

The coupon changes were discussed by all the underwriters and the company, and took place after the ratings of the contingent capital securities were determined to be sub-investment grade.

The "equity waterfall" was structured and agreed by the structuring advisers and the company. You suggested we insisted that the 6.9 per cent issue be positioned at the top of the equity waterfall. That was not the case. In fact, we suggested it be placed much further down, reflecting its "must pay" features. However, the structuring advisers and the company decided to put it at the top of the waterfall, reflecting the short call date of the bond.

Before the transaction was publicly announced, Goldman Sachs held positions in a number of the securities which were subject to the offer. This is entirely normal, and the other banks involved would likely have held positions as well, as a result of their roles as market-makers. In fact, the offering memorandum made it clear that dealer managers might hold positions and participate in the offer. For your information, our proprietary position in the 6.9 per cent securities ahead of the announcement of the transaction was less than $20m, and not the $500m you suggested.

All investment banks have Chinese walls in place precisely to avoid and manage the type of conflict to which your article alludes. We are highly confident of the effectiveness of our Chinese walls.

Lucas van Praag,
Managing Director,
Goldman, Sachs & Co,
New York, NY, US