Conflict between advisory and investment roles of banks: Goldman's experiences

Today's news : When the British airport company BAA was considering hiring Goldman Sachs as an adviser to fend off a hostile bid from a Spanish company, Goldman instead approached BAA with its own hostile bid.
While the WSJ calls Goldman the "world's leader in providing merger advice to companies", Goldman also has an investment arm which buys companies, later to be restructured and re-sold.
Needless to say, BAA spurned Goldman in favor of a more impartial merger adviser.

This is only one of many such incidents in which Goldman's own investing business has forayed into the M&A advisory business' territory. BSkyB, a UK television company, also dumped Goldman as its broker, triggering speculation that this may have been a result of Goldman's growing interest in M&As on its own account.

That there exist conflicts of interest between the investment and corporate advisory sections of a bank is by no means news. Consequences of this type of conflict affects both the client company(by casting doubt on the impartiality of the advice they receive) and the bank itself (by having one business - in this case the investing business - poach clients from another - the corporate advisory business).

The existing mechanism to deal with these conflicts is a Chinese wall. And even without reading Hasan Seyhun's paper, we know that these walls are not as effective as their namesake, the Great Wall of China.

So, the problem exists. While nobody can agree on how to reduce these types of conflicts, some people are taking a stab at it. Australia's regulator ASIC is looking to push the boundaries on regulations on these Chinese walls in a case against Citigroup, the world's largest investment banker. Regardless of the outcome of the lawsuit, it has drawn worldwide attention to the issues involved. Amy Stone over at Business Week also has some suggestions for less drastic ways to reduce this conflict between bank departments.