Firms jealous of Goldman Sachs’ (GS) spectacular profitability often take aim at its appetite for situations rife with conflicts of interest. A few examples: in the recent New York Stock Exchange acquisition of electronic exchange Archipelago, Goldman acted as advisor to both the NYSE and Archipelago even though it was Archipelago’s biggest shareholder and a large customer, and also owned the biggest NYSE specialist. And let’s not forget, an alumnus, John Thain, is the NYSE’s CEO. That’s about as muddy as you can get.
In the summer of 2006, Goldman was fired by the city of Chicago which it was advising on the sale of Midway airport when it learned that Goldman was in negotiating to buy a European infrastructure player that was planning to bid on Midway. Goldman has also gone further than any other firm in becoming a hedge fund, yet is still one of the very biggest prime brokers (meaning hedge funds get financing, clearing, settlement, and trade execution through Goldman).
Now in Wall Street, customers are often competitors. But Goldman seems to be taking its propensities to push the envelope into the brave new world of carbon trading.
Goldman, like other investment banks, has recognized the potential of this business and has made investments. In September of last year, it took a 10.1% stake in Climate Exchange, a UK investor in carbon futures, for $23 million. That deal enabled Carbon Exchange to purchase full control of climate exchanges in London and Chicago in which it had held only minority stakes. Morgan Stanley (MS) has announced plans to invest $3 billion over the next five years, buying and selling carbon credits. JP Morgan (JPM) will invest over $250 million in wind farms. Dresdner Bank and Gazprom just formed a carbon trading joint venture that is expected to be a formidable competitor. Goldman also intends to invest $1 billion in renewable energy.
So far, nothing unusual about this pattern. Firms are trying to get in early on what promises to be a profitable and highly visible market, and many are planning to act both as principal and agent, brokering carbon credits as well as investing in projects.
But Goldman appears to have a particularly astute appreciation of the many ways to extract profit from this new sector. First, it is the most aggressive in taking a position in carbon exchanges (if the market becomes efficient, exchanges will be the point of departure for pricing large OTC trades, and could make OTC trades a marginal activity). Goldman made more investments in electronic trading networks than any other brokerage firm and clearly sees advantages to having a strong position in exchanges.
Similarly, Goldman also seems to exploiting opportunities that others may have not yet recognized. A colleague who played an important role in launching one of the very first carbon exchanges also happens to be a customer and counterparty of Goldman. The firm approached him about a sale of forest land in South Africa. My source has noticed that Goldman has also been buying and selling huge forest acreage in South America. He believes they are flipping the properties and retaining the carbon rights. We’ll know soon enough if he is correct.