Goldman Received Early Word
Of Plan to End Long-Bond Sales
By GREGORY ZUCKERMAN
Staff Reporter of THE WALL STREET JOURNAL
The Treasury bond-trading investigation has drawn in one of Wall Street's giants.
Goldman Sachs has confirmed to authorities that it was among the companies tipped off by an industry consultant to the surprise announcement that the Treasury Department was about to stop selling the 30-year bond. The information, which was released by the consultant before a government-imposed embargo, may have helped the firm decide its trading strategy for Treasury bonds before the news was officially announced on Oct. 31, according to people familiar with the matter.
It isn't known whether Goldman made any profit through its access to the information. Nor is it clear that trading on such information violates any existing securities laws.
But the fact that Goldman, one of the most prestigious securities firms on Wall Street, had access to the leaked information and may have used it as part of its trading strategy suggests that the unauthorized information was more widely shared throughout the bond market than was initially known, and could lead to the most wide-ranging investigation of the bond business in years.
The Treasury's announcement Oct. 31 that it would kill the long bond sparked the biggest bond-market rally in 14 years, with bond prices starting to jump well before the news was made public at 10 a.m. The department last week determined that Pete Davis, a longtime industry consultant, had attended a 9 a.m. briefing that day for the press in which Treasury officials outlined their plans. Though the information was embargoed for 10 a.m., Mr. Davis acknowledges that he tipped off some of his clients to the news before then, though he said he informed them of the government embargo.
Mr. Davis has named only two of the clients who received the information, neither of whom is among the top tier of Wall Street bond-trading activities. That changes with the involvement now of Goldman, which has in recent days disclosed to investigators that it is a client of Mr. Davis's and that it also received a call from him on the morning of Oct. 31 with news of the Treasury move.
Last Monday, after reading news reports about the leak, Goldman contacted the Securities and Exchange Commission and the Treasury Department to discuss the matter. The SEC has launched an inquiry into the firm's activities, as well as those of other firms, and Goldman is sharing trading and phone records with the investigators.
"When we became aware of this situation, we contacted the appropriate authorities to inform them of Mr. Davis' call and provide them with any and all information that might be of assistance to them in connection with any review they wished to conduct," said a Goldman statement. "We do not believe we have engaged in any wrongful behavior."
While Goldman is the biggest firm to acknowledge receiving the tip ahead of the Treasury's announcement, industry experts say other firms could yet be caught up in the fallout. The SEC has confirmed that it is in the middle of a probe into the activities of several bond-trading firms that received news of the Treasury's move from Mr. Davis before the official announcement. The identities of the other firms aren't known, nor is it clear whether they traded on the information.
A spokesman for the SEC didn't return telephone calls seeking comment.
Before Treasury announced its plans on Oct. 31, Goldman's various Treasury trading desks held positions that were somewhat bearish on the 30-year bond and long-term Treasurys in general, according to traders at other firms who traded with Goldman. In effect, the firm was betting that the price of the 30-year bond would fall.
But that stance changed that morning, according to these traders, after Goldman received a call from Mr. Davis shortly after the news conference ended at 9:30 a.m., telling the firm that the 30-year bond would be discontinued. According to traders in the market, Goldman stepped up its trading after 9:30 a.m., buying 30-year bonds and adding to positions in the futures market. The traders say the firm's transactions took place before the Treasury Department inadvertently put the announcement on its own Web site prematurely at around 9:49 a.m.
Goldman didn't receive its call from Mr. Davis until after 9:30 that morning. That means the firm had no more than 19 minutes to trade on the news before it was disclosed on the Treasury Web site, raising questions in some quarters about how extensive the firm's trading activity could have been. And there may be other reasons Goldman was buying bonds.
Mr. Davis has said that he informed those clients whom he called before the official announcement that the information he was passing on was to be embargoed until the department's official announcement at 10 a.m. If Goldman wasn't told that the information it was receiving was embargoed, and that the firm wasn't supposed to be trading on it, there may not have been any insider trading committed, securities lawyers say. Regulators could argue, however, that it was well known in the bond market that the news embargo would last until 10 a.m. And even if the embargo was detailed by Mr. Davis, it isn't clear if trading on embargoed information from Treasury falls under the category of insider trading.
What is clear is that bond prices jumped well before the 10 a.m. official announcement, and even before the Web-site posting, amid a flurry of activity. From 9:30 a.m. -- about when the news conference ended -- to the Web-site posting, the 30-year bond rose about one-quarter of a point, or $2.50 for each $1,000 face value, after trading from 9 a.m. to 9:30 a.m. within a much narrower range of about one-eighth of a point. By 10 a.m., the price on the long bond rose by more than 1 1/2 points, or $15 for each $1,000 face value, to 104.
Since the morning when the department's announcement was made, that spurt of trading before the announcement has raised eyebrows on Wall Street.
The Treasury's 10 a.m. announcement came as part of its regular quarterly statement detailing how many bonds it planned to sell in the coming quarter. Wall Street bond traders usually do little trading for their own accounts before such an important announcement, which sometimes affects prices. So when activity picked up on that morning, and prices moved higher in the hour or so before the official announcement, it raised suspicions on trading desks.
"There was strong activity buying the bond, well before the leak on the Web site," says Bill King, a strategist at M. Ramsey King Securities in Chicago. "No one understood what was going on."
By the end of the day, the 30-year Treasury soared, helping traders across Wall Street make -- and lose -- hundreds of millions of dollars. The price on the 30-year bond jumped 5 9/32 points, or $52.81 for a bond with $1,000 face value, to 107 21/32, the biggest move for the bond since 1987 and about three times the previous biggest jump this year. The move sent the bond's yield, which moves in the opposite direction, to 4.88% from 5.22% on Tuesday, the lowest level in three years.
Until Goldman's acknowledgment, only two other firms had acknowledged they received word from Mr. Davis of the Treasury news before it was announced, Stone & McCarthy Associates, a bond-research firm, and Capra Asset Management Inc., a hedge fund. Both firms have said they didn't do any trading on the morning before the Treasury announcement, despite the tip from Mr. Davis.
-- John Connor contributed to this article.
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