While we doubt anything material will emerge for various obvious reasons, the NY Post reports that the DOJ is probing Goldman Sachs for alleged Treasury auction rigging: the charge is that Goldman, one of the 23 US primary dealers, won almost all Treasury bond auctions from 2007 to about 2011 even after the Treasury department established safeguards to maintain competitiveness. The case is said to center on chats and emails showing Goldman traders sharing price information with traders at other banks:
Chats and emails believed to show Goldman traders sharing sensitive price information with traders at other banks are at the center of the case, according to sources familiar with the investigation.
“They didn’t lose many bids,” one person who has seen the bid data told The Post. The prices Goldman offered for Treasury bonds “would be very close” but just above offers from other banks, and typically arrived “at the end of the auction.”
While not the first time we have had news of a DOJ probe into Treasury market rigging – the Post itself reported last March virtually the same story, namely that “Goldman Sachs probed in alleged Treasury rigging“, and prior that in June of 2015 – the details are new, and suggest that collusion between the banks reaches far beyond merely FX. Also notable is the deference to Goldman by other banks, raising questions what was the quid pro quo. The timing is also notable, coming at a time when at least half a dozen Goldman Sachs alumni are in high levels of the executive branch. Which is perhaps why Goldman feels compelled to clarify that “No one has accused any bank, or Mnuchin or Cohn, of any wrongdoing.”
Some more details:
The investigation is currently focusing on Goldman’s interactions with the bedrock of the US financial system: the Treasury’s auctions for debt in the form of bonds and notes.
Those bonds, which are sold in about 300 auctions a year, not only finance the government’s operations, but also help set rates for everything from home mortgages to credit cards.
Goldman is one of 23 primary dealers that bids directly with the government and then distributes Treasury bonds to their clients. In the auctions, those primary dealers submit secret ballots before 11 a.m. for as much as 35 percent of the share of the offering. The bank with the highest bid wins.
The Post adds that the Treasury was aware of Goldman’s disproportionate winning streak at the time but “assumed that the bank was just better at pricing the bonds.” Perhaps, or maybe Goldman was just looking to frontrun other bidders: think of it as high frequency trading in one of the world’s slowest markets.
Treasury officials were aware that other major investors, including some central banks, had concerns that banks were front-running their own customers in order to make more money off of them. “There had been some nervousness on the part of large buyers,” the person said. “They were worried about being front-run sometimes.”
That concern contributed to a surge in direct bidders — investors who bypass the bank and try to get a chunk of the bonds through the auction process—around 2010, the source said.
At the time, big investors wanted “to put their money to work in the government-bond market without revealing their intentions to the primary dealers,” noted a January 2010 Wall Street Journal article about the rise in direct bidders. “When you see a surge in direct bidders, you have to ask what it means,” the person said.
Confirming that Primary Dealers felt trapped after the Post first broke news of the investigation in 2015, they promptly changed how they bid on auctions, according to the suit.
“At the time that the rigging is believed the have happened, Cohn was the No. 2 person at Goldman, behind CEO Lloyd Blankfein. In Cohn’s position as president and co-chief operating officer — a position he later ran by himself — he oversaw the unit of the bank that submitted the bids to Treasury.”
Which is likely why if and when the DOJ finally cracks down on the responsible parties, Goldman’s name, despite its dominance in TSY auctions in the 2007-2011 period, will not be named. Conveniently for the bank that has spawned more central bankers and politicians in the modern era than anyone else, at least four other banks are being investigated for colluding with Goldman traders: Deutsche Bank, Royal Bank of Scotland, UBS, and BNP Paribas.
Treasury officials under former secretary, Jacob Lew, told the Post they found the investigation highly embarrassing, and pressed for a quick resolution of the probe. At least four other agencies—the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the New York Department of Financial Services, as well as the European Commission—are looking into the alleged rigging.
And at least when it comes to Goldman, they will find nothing wrong.