Banks, Conflicts of Interest and Metals ETF's

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Commodities

A good friend of mine called me up to meet for lunch today. He’s a patent attorney by profession but when we get together, we talk about politics and the economy. Today’s lunch was no exception and the theme of the lunch (if we could actually call it a theme) was this — there are too many conflicts of interest within the financial services industry. Now you say, that’s no great statement Lisa. Any idiot knows that (and I will say I understand this in particular as a former Arthur Andersen employee). But the conversation got me wondering that we all know banks publish research reports on various industry sectors. But in the early 2000’s the greatest conflict had to do with investment banks and their research arms putting up that invisible wall to maintain neutrality when the research side published reports, stock picks, sector analyses etc. yet at the same time the trading arms of the same companies were often shorting the market (just like certain investments banks recently in the case of mortgages, Bear, Lehman, etc.)

Well, assuming you bought into the fact that the banks were able to do that successfully (that separation of church and state), what do you make of the research reports published by banks that have their own ETF’s (Exchange Traded Funds) for the exact same things they cover in their research? Just the other day, Stuart posted our take on the latest Deutsche Bank report (and of course we disagreed with parts of it). But did you know that Deutsche Bank also runs several base metal ETF’s? Here is a list of ETFs found in a random Google search. Scroll down to PowerShares DB Base Metals Double Long ETN. DB stands for Deutsche Bank.

The question we raise is what is Deutsche Bank’s role in managing the ETF’s, implementing trades and publishing commodity research ” not to mention pushing the firm’s own positions on its customers? Does Deutsche Bank act merely as index publisher and fund owner or does some other desk in some other remote location take positions on where and how the dollars are flowing into or out of ETF’s?

We don’t mean to pick on Deutsche Bank. The bank that really has a conflict of interest is Goldman Sachs. We wrote about them a few weeks ago. And our new favorite blog covers Goldman on a daily basis, ZeroHedge. Here is one piece that gives a sense of the conflicts of interest.

In the name of fairness, we’ll do some more homework and publish details on other banks that may have a similar conflict of interest.

–Lisa Reisman

Comment (1)

  1. AT says:

    If you want to dig further into this conspiracy theory, check out the actions of the goldman sachs commodity index (now owned by McGraw Hill) in August/September ’06. I’m specifically talking about the change in the gasoline weighting in the total return index to accomodate for the switch to the RBOB contract as the main gasoline trading unit on the NYMEX. The ensuing loss of liquidity in the gasoline contract coupled with the much lower weighting in the most dominant commodity index caused a huge price decline in gasoline futures. As I understand it, the man responsible for the weightings in this index was none other than Goldman’s head commodity strategist, Jeffrey Currie. Of course I have no idea how the internal hedge fund or their traders were positioned, but I’m pretty sure that the research arm was well out in front of this change.
    Managing ETFs is not a huge money-making enterprise, at least not relative to Goldman’s 2Q profits, but the inside knowledge and potential market manipulation they allow could be extremely profitable.

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