SCHAER CALLS FOR FEDERAL RULES PREVENTING BOND FIRMS FROM DUAL ROLE

SCHAER CALLS FOR FEDERAL RULES PREVENTING
BOND FIRMS FROM DUAL ROLE
Will Engage Governor and Federal Regulators to Prevent Firms
From Acting in Dual Capacity As Investment Banker and Investment Advisor

(PASSAIC) - Assembly Financial Institutions and Insurance Committee Chairman Gary S. Schaer today called for new federal regulations to prohibit firms which engage in investment banking in the public sector from acting as an aftermarket investment advisor to other customers for the same or similar securities.

The practice came to light last month when The Star-Ledger reported on Goldman Sachs' seemingly at-odds strategy of underwriting New Jersey bonds while simultaneously advising investors willing to bet on their default potential, a strategy known as "shorting." In a letter sent to Goldman CEO Lloyd Blankfein, Schaer wrote the practices "at the very least, raise the perception of conflict of interest." In a reply to Schaer, the company defended its actions.

In a letter sent today to Goldman Managing Director Kevin Willens, Schaer said he would call upon Governor Jon S. Corzine to petition the Municipal Securities Rulemaking Board and other federal oversight agencies to develop regulations to end the practice.

"The system as it currently exists puts New Jersey taxpayers in an unenviable, if not untenable, position," wrote Schaer (D-Passaic/Bergen/Essex). "New Jersey taxpayers can not be expected to pay tens of millions of dollars in investment banking fees while another department of the very same firm - albeit one clearly and strategically walled off - actively and aggressively advocates the sale of the very same or similar bonds in the aftermarket."

Goldman Sachs has been one of the state's leading private-sector partners in marketing state securities. The firm has earned about $15 million from New Jersey bond deals since 2002. Twelve other states have expressed similar concerns with the industry-wide practice.

"I would be negligent if I were to ask my constituents and New Jersey taxpayers to continue to accept such an arrangement," Schaer wrote.

A copy of Chairman Schaer's letter to Goldman Sachs follows.
 
January 27, 2009

Mr. Kevin Willens
Managing Director
Goldman Sachs & Co.
85 Broad Street
New York, NY 10004

Dear Mr. Willens:

Thank you for your kind response to my letter of December 1, 2008 sent to Mr. Lloyd Blankfein of your firm. Our subsequent phone conversation was helpful in further clarifying Goldman's position on the matter.

While I agree that Goldman's actions were not in any way improper, I do not believe that such practices should be permitted to continue. New Jersey taxpayers can not be expected to pay tens of millions of dollars in investment banking fees while another department of the very same firm -- albeit one clearly and strategically walled off -- actively and aggressively advocates the sale of the very same or similar bonds in the aftermarket.

Although I have no doubt that Goldman and other investment banks which New Jersey has used in the past have engaged in the utmost professional conduct, I would be negligent if I were to ask my constituents and New Jersey taxpayers to continue to accept such an arrangement.

Clearly, Goldman and other firms fulfill their responsibilities to their customers when they recommend the purchase or sale of New Jersey bonds, among other securities. The sale of New Jersey bonds in the aftermarket reduces their underlying value. Future new issues of New Jersey bonds are subsequently priced cheaper and at higher yields, with New Jersey taxpayers left paying higher interest rates as a result.

I believe that though certain investment firms may benefit by receiving both investment banking fees and commissions, the system as it currently exists puts New Jersey taxpayers in an unenviable, if not untenable, position.

In the spirit of protecting New Jersey taxpayers, I will be asking Governor Jon S. Corzine to initiate discussions with representatives of the Municipal Securities Rulemaking Board and the Securities and Exchange Commission to develop regulations that prohibit firms which engage in public sector investment banking from providing research and analysis to customers regarding aftermarket purchases and sales.

Once again, thank you for your firm's efforts on New Jersey's behalf. As we move forward, I look forward to being in contact with you in order to receive your suggestions and expertise.

Sincerely,

Gary S. Schaer
Assemblyman, 36th District

Cc: Hon. Jon S. Corzine, Governor
Hon. David Rousseau, Treasurer