NEW YORK (CNN/Money) -
No sooner did the New York Stock Exchange name Goldman Sachs president John Thain as its chief executive Thursday than critics started carping about how the fox was being put in charge of the hen house.
Goldman owns Spear Leeds & Kellogg which, as the second-largest specialist firm at the Big Board acts as the middleman on 20 percent of all NYSE stock trades. The specialist system has come under heavy fire ever since former Exchange head Dick Grasso was forced out in September.
The latest salvo came Tuesday when the California Public Employees' Retirement System launched a class action suit alleging that specialist firms had routinely taken advantage of their inside knowledge on stock pricing to unfairly profit. Both Goldman Sachs and the Exchange were named in the Calpers suit.
Thain's appointment, complains Doug Kass -- a hedge fund manager whose Seabreeze Partners has sold short both Goldman and specialist firm LaBranche -- just doesn't make sense.
"It's atrocious," he said. "This is fraught with all sorts of conflicts. Given everything we've gone through in terms of corporate governance it just seems untoward."
Kass believes that the specialist system is headed for eventual extinction, which would force Goldman to take a huge impairment charge for its $7 billion acquisition of Spear Leeds in 2000 and would push LaBranche shares down to the company's cash level.
Kass and other critics say that the electronic matching of buy and sell orders -- the modus operandi on all of the world's other major stock exchanges -- is far more cost efficient than the specialist system. (Until it bought Spear Leeds, Goldman was a leading agitator for electronic trading.) The NYSE has long argued that the specialist system, because it guarantees market liquidity, promotes a more orderly market.
In a press conference Thursday, Thain said that the NYSE may need to embrace more electronic trading, but also said that "it's very important the Exchange's specialists retain their role."
It is obviously also important to Goldman for the specialists to retain their role. Picking Thain, who was one step below Goldman CEO Henry Paulson, does nothing to clear the NYSE of its image as a cigar-filled room whose members profit at the public's expense.
"In John Thain, the NYSE selected someone very capable, who obviously has the appropriate level of understanding of the trading functions and who is well liked by a wide range of people within the NYSE," said Calpers president Sean Harrigan in a statement. "We find no fault with his professional credentials, however, his selection doesn't add to our confidence that the NYSE leadership will be truly independent. After all, just yesterday we sued one of the specialist firms owned by the company he led, Goldman Sachs."
At their press conference both Thain and NYSE interim chairman John Reed said any conflict of interest issues will be resolved. This will be tough to do. While Thain could respectfully leave the room whenever decisions centering on Spear Leeds come up, he clearly needs to be involved in decisions involving the specialists system in general -- the guts of the Exchange's business.
A blind trust, where Thain would place his over-$300 million in Goldman stock with a third party which would have complete discretion over buying or selling it, might not be workable since the stake is so large. A better option might be for Thain to make plans to shed all 3.2 million of his Goldman shares. Since Thain's stake represents about 1.5 percent of Goldman's public float -- the shares that trade publicly -- such a sale could put pressure on the stock.
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