New Jersey to Goldman Sachs: Please Explain

A New Jersey assemblyman has demanded that Goldman Sachs explain why the firm advised investors to bet that the state would default on repaying its loans, according to the Newark Star Ledger. (Unfortunately, the story isn’t online yet.)

Assemblyman Gary Schaer, the Democratic chairman of the Assembly Financial Institutions and Insurance Committee, wrote to Goldman’s CEO following an article co-written by ProPublica and the Star Ledger that detailed how the investment bank had been talking down New Jersey’s bonds, after it had also taking underwriting fees from the state to help sell them.

“This report is troubling and, at the very least, raises the perception of conflict of interest,” said Schaer. “To have both options promoted by the same firm on the same or similar securities – especially by a firm that has directly profited from being one of New Jersey’s leading investment bankers – is disturbing.”

The advice came in a 58-page “private and confidential” report that Goldman was circulating to its hedge fund clients as late as September.

Goldman spokesman, Michael DuVally, said that there is no conflict of interest.

“The material was prepared by a group within the Securities Division on the public side of the ‘Chinese Wall’ and does not represent the views of Goldman Sachs as a firm,” Duvally said. “It would be inappropriate for our municipal banking department, which works with municipalities on underwriting assignments, to be involved in the generation of such material or to influence the people producing it.”

Goldman will respond to Shaer’s letter, according to DuVally.

New Jersey, like many other states, is facing a budget crisis, leading some to worry that it may default on part of its bond debt.

“Of the approximate $32 billion in outstanding debt in New Jersey, approximately $28 billion was never approved by the voters,” John L. Kraft, a bond attorney in New Jersey, told us.

The state has no legal obligation to repay that portion, according to Kraft, because the contracts specified that the repayments would only be made if the legislature voted to approve them every year.

“Faced with budget deficits of many billions of dollars, and also being required to adopt a balanced budget each year, in these economic times, it’s possible that the state would choose to spend its money on essential purposes such as aid to the elderly and welfare, education, rather than making a debt service payment that they’re not required by law to make,” Kraft said.

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