By Justin Baer and Katy Burne
Securities regulators have opened an inquiry into the way
Goldman Sachs Group Inc., Citigroup Inc. and other banks divvy up
new bond issues among investors, people familiar with the matter
said.
The Securities and Exchange Commission has sent requests for
information about how banks allocate corporate-bond deals and how
they traded those bonds after they were sold, the people said. The
regulator is examining whether banks grant some money managers too
much influence in these offerings, leaving smaller bond investors
at a disadvantage, said the people.
The SEC, which made its requests during the fourth quarter,
sought information about several specific deals, including Verizon
Communications Inc.'s record-setting $49 billion bond sale last
September, said people familiar with the matter.
The probe is surfacing as Wall Street comes off a record year
for new issuance of corporate bonds, such as the Verizon deal and
another huge offering from Apple Inc. The surge was fueled by low
interest rates and red-hot demand for debt securities that can
deliver investors better returns than low-yielding Treasurys and
other government-backed bonds.
Many money managers have been scrambling to snap up as much new
debt as they can, as bonds from newer, larger deals are the most
easily bought and sold when the credit markets run into trouble.
The boom has also boosted the power of the investment-management
industry's biggest and savviest players, which have used their
influence to extract higher yields on bond offerings than are
available to investors when the bonds hit the open market.
The shift has also left some smaller investors complaining they
didn't get the amount of bonds they wanted, particularly when
demand for a new bond far outweighs supply. Bigger investment
firms' negotiations for lower pricing on some deals allow them to
harvest a quick profit by, in some cases, selling to others after
the debt prices, said people familiar with the matter.
Facing new capital rules that make it more costly to store bonds
on their balance sheets, banks have looked to these large
investors--and biggest trading partners--to take on more of the
debt that has come with the deluge of corporate borrowing.
"The incentive is there [for banks] to take care of their
biggest clients," said Jason Graybill, senior managing director at
Carret Asset Management LLC, who oversees $1.3 billion in fixed
income. "It's harder for smaller shops to get the allocations, and
it's the way it has worked for a long time."
Goldman made a disclosure on an inquiry in a regulatory filing
Friday, noting for the first time that "allocations of and trading
in fixed-income securities" were among the activities regulators
were probing.
Goldman and other investment banks sell stocks, bonds and other
securities on behalf of clients seeking to raise money in the
capital markets. They allocate each offering to money managers and
other investors.
Large money managers' clout in the corporate-bond market has
grown in recent years as they have bought huge portions of
record-breaking offerings.
Pacific Investment Management Co. and BlackRock Inc. bought a
combined $13 billion of Verizon's record $49 billion bond sale last
September. Investors had put in $100 billion worth of orders to buy
the bonds, according to people familiar with the deal. From the
moment the bonds were priced, parts of the offering rose about 14%
in value in just a couple of weeks.
In the same filing, Goldman lowered the top end of its range of
"reasonably possible" legal costs to $3.6 billion more than what it
had already set aside in reserves. That figure stood at $4 billion
in the prior quarter.
Under accounting standards, "reasonably possible" losses refer
to those events whose possibility of occurring is less than likely
yet more than remote.
Goldman had raised its provisions for legal and regulatory
issues to $561 million in the fourth quarter, more than $400
million higher than in the third quarter.
"Every quarter, we do what is basically the best estimate in
that particular quarter, and we add to the reserves," Harvey
Schwartz, Goldman's chief financial officer, said during a January
conference call with analysts.
Goldman also said in the filing Friday that its traders had
posted net losses on 27 days during 2013. The firm also tallied
more than $100 million in net trading revenue on 34 days. The firm
had 16 money-losing days in 2012. On 41 occasions that year,
trading revenue exceeded $100 million.
Goldman also said it also granted employees 13.8 million
restricted shares in early 2014 as part their year-end bonuses.
Jean Eaglesham and Matt Wirz contributed to this article.
Corrections & Amplifications
Goldman had 27 trading-loss days in 2013. An earlier version of
this article said the firm had 26.
Write to Justin Baer at justin.baer@wsj.com
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