The Goldman SEC Case

The merits of the SEC case against Goldman Sachs aside, the ethical issues are crystal clear. Pushing investments that have a high probability of failure is just plain wrong. Blaming the rating agencies for putting their stamp of approval on these bundles of soon to be worthless mortgages is disingenuous at best.

Given the “pay grade” of those selling these investments wouldn’t you think they would do some due diligence on their value? Instead, those peddling this junk were said to be relying on the idea that real estate prices were going to rise forever.

Even if that dicey concept were true, much of what was in these packages could not stand the light of day. People in houses miles beyond their means; a $14,000 dollar a year farm laborer in a $750,000 house, others all across the country enticed by no money down, no closing costs, low payments for a few months and then wham! a recipe for disaster. Anyone who cared enough to look could see these bundles were a time bomb waiting to explode.

The banks, pension funds and other “sophisticated” types who bought this junk; should they have done their due diligence? You bet. People on all sides of this deal who were being paid hundreds of thousands of dollars, sometimes millions each year should have seen the risk.

Truth is much of this marketplace has nothing to do with investing. It is pure and simple gambling. Those involved didn’t even own the bundles of mortgages; they just bet on their value. It’s like picking out a house you don’t own and betting someone it will burn down. Goldman’s position is that they were just the bookie. The SEC thinks Goldman knew the house on was on fire. Thereon lies the case; fraud or not.

Who cares, other than the little old ladies, retired workers and other pensioners who lost their savings, not to mention the taxpayers worldwide who had to bail Goldman and other banks out when the world economy went south in large part because of these –too big to fail- bank’s gambling problems. In case you are wondering, why banks and others in the wonderful world of stocks, bonds, commodities and such are allowed to gamble in this manner when the rest of us have to go to a casino, there is a reason. When it comes to these securities Wall Street really is a casino, a legal casino.

The Commodity Futures Modernization Act of 2000 along with a 1992 Act overturned reforms enacted following the 1907 bank panic. That turned our financial system noted for its transparency and security into –well– an unregulated casino. So it may very well be that Goldman Sachs –and perhaps other big banks– did nothing illegal. Fleecing the suckers may be perfectly legal. Ethics, however are another matter.

Everyone from the folks who coached the $14,000 a year farm laborer on how to get a loan he could never repay, to the bank that originated the loan, to those who sold and resold it and those who bundled it with a bunch of other bad loans, and finally those in the too-big-to fail banks who acted as bookies or bet the savings of pensioners on these loans, every single individual in that chain was ethically bankrupt.

Let’s move away from the smarmy little characters at the beginning of each of these human tragedies who pushed foolish dreamers into deals that would ruin them. Let’s move up to the six and seven figure folk in their $3,000 outfits who turned these individual travesties into a nightmare.

Take Goldman Sachs forinstance. As a publically traded company under Sarbanes-Oxley (SOX) they are required to offer ethics training to their employees. It would be hard to imagine how anyone involved in this high flying flimflam could have considered any part of it ethical. Let alone how Goldman Sachs’ management could believe they have fulfilled their SOX mandated ethics training obligations.

The Goldna Sachs Saga

“Those who fail to learn from the mistakes of their predecessors are destined to repeat them.”

George Santayana

Marcus Goldman and his family launched their company in 1869, building a reputation highlighted in 1896 with an invitation to join the New York Stock Exchange (NYSE) and in 1906 to manage the initial public offering (IPO) for Sears Roebuck.

A couple decades later the partners launched Goldman Sachs Trading Corporation. It was basically a Ponzi scheme that made tons of money before the bottom fell out in 1929. At that point former office boy, Sidney Weinberg, took the helm and spent a quarter century rebuilding their reputation. In 1956 Goldman Sachs landed the IPO of the century, Ford Motor Company.

Even as Weinberg rebuilt Goldman’s reputation, however, others in the firm lost sight of their role: putting the Capital into Capitalism. Along with much of the banking world, Goldman Sachs moved increasingly into trading, crossing a line long considered a conflict of interest; a world of strange financial products, often with no societal value. They, of course, didn’t see it that way given the astronomical amounts the firm pocketed.

This world rapidly evolved into little more than a gambling den. The virtual Casino on Wall Street had become a reality. The bankers’ political clout (read contributions) generated legislation in 1992 and 2000 exempting derivatives –including their high risk cousins, synthetic derivatives and credit default swaps– from gambling laws.

From there on it was a race to disaster. In 2003 legendary investor Warren Buffett warned that derivatives could become “Financial weapons of mass destruction;” a warning soon to become fact. They became a root cause of the global financial sector collapse.

In the midst of this Goldman Sachs got involved in a smarmy deal. The SEC says they peddled some scummy bundles of mortgage derivatives to pension fund managers, European banks, and other large “sophisticated” investors. Legally the case is said to be on shaky ground. But why would Goldman Sachs (and other banks) ever let it get onto legal ground?

We don’t know if the course they have been following is legal, but it is anything but ethical. Under Sarbanes-Oxley (SOX) publically traded companies are required to offer those in their employ ethics training. It would be hard to imagine how anyone involved in this high flying flimflam could have considered any part of it ethical. Let alone how Goldman Sachs’ management could believe they fulfilled their SOX mandated ethics training obligation.

In a business built on trust and reputation, how could Goldman Sachs forget how long it took Sidney Weinberg to restore their reputation when it tanked in the 1920s? Or a famous quote from their largest shareholder Warren Buffett, “It takes 20 years to build a reputation and five minutes to ruin it.”