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.

Dear A.I.G., I Quit!

Poor Jake!

An A.I.G. EVP vented on the New York Times opinion page today (3.25.09). Jake DeSantis is quitting because he has been betrayed by the company that has paid him to make money for them trading “Commodities, Energy, (and) Derivatives” according to his public profile on the professional social media site, LinkedIn. Now A.I.G. (and most of the rest of us) expect him to give back the +/- million buck bonus he was paid earlier this month.

Jake says it’s unfair that A.I.G. is reneging on the deal they promised him. That the division where he labored 10-14 hours a day was not responsible for the “credit swaps” that sent A.I.G. reeling. That he had agreed to work for $1 a year on the belief that he would be rewarded for his effort with the big bonus in question. It was a deal, a “contract in writing,” and he should get to keep his money. So there!

Jake says, “I was raised by schoolteachers working multiple jobs in a world of closing steel mills. My hard work earned me acceptance to M.I.T., and the institute’s generous financial aid enabled me to attend. I had fulfilled my American dream.” Jake graduated from M.I.T. S.M., Materials Science in 1992. His thesis? "Chemical Vapor Deposition of Iridium and Rhodium from Organometallic Precursors conducted at the Los Alamos National Laboratory”, where he was an intern.

Bright guy, most of us can’t pronounce that stuff let alone understand what it is about. So where did this scientific genius head? To the Union Bank of Switzerland (UBS) where he worked in “Equity derivatives trading.” Isn’t that what’s being called “toxic” these days? After six years at UBS he moved to A.I.G.. Over the last eleven years Jake made a lot of money.

He says, “I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn’t disagree.”

Hard work? Actually most would argue that commodity and derivative trading during the boom years that Jake has been at it, was a piece of cake. If -as he says- he and his fellows have been overpaid, why did it not occur to him earlier that the retention contracts he and others signed to hang in there and try to salvage the company that has made him rich were wrong? Is he saying that the sailors on a sinking ship should be given a contract assuring them of a big pay check before they agree to help to bail it out? Just because the hole in the bottom of the ship is in the bow doesn’t relieve those in the stern from the need to help save the ship.

That’s what it’s all about, Jake. If the American people -few of whom are as privileged as you- are going to throw billions of their hard earned dollars into saving your company, shouldn’t you be willing to work for a $1 a year and live off the fat of the land (all the money you made in the last eleven years) for a couple years to help save the company that has been so good to you? When little folks all over the country are being asked to give up part of their earnings, why are you whining all the way back to your luxury life?

Where is the moral compass that allows your vindictive plan to be sure that the company that put you where you are and/or the taxpayers who are trying to save the company do not get one cent of the bonus that you are giving up. Where would you be if A.I.G. had been allowed to fail? There would be no bonus. Nor would there be most of the other goodies that assure that you and yours will live comfortably for the rest of your lives.

You stepped off the ethical high ground when it even crossed your mind that you should be paid to do the right thing. Maybe you didn't lose any money for your company but you are a loser Jake!