Saturday, May 1, 2010

The Flogging of Goldman Sachs--A Shell Game, A Semantic Problem, or Populist Rage Gone Wild?

Back before law and order came here to Arizona, they used to just take guilty people out and hang them. But, as locals love to point out, eventually justice became more process-oriented. Since then, they have made a commitment to give the criminals a fair trial before they hang them.

The U.S. Senate and the news media showed last week they are still in the Wild West days. Several Goldman Sachs traders and executives were summoned to the Committee on Investigations to be publicly whipped and shamed for whatever it was they supposedly had done wrong. The message was clear. We know these guys are horrible people and need to be publicly berated and hung. The fact that none of them has broken the law is an irrelevant nuisance that shouldn't slow us down.

Perhaps the most telling line of the 11-hour Senate committee ordeal was spoken by Sen. Jon Tester (D-MT) who commented at one point that "it's like we're speaking a different language here." Tester was referring to his belief that the Goldman representatives were being evasive and unresponsive to many of the questions they were asked by committee members.

In fact, the Goldman folks weren't being evasive. They really were speaking a different language. The most dramatic example of that disconnect occurred during the opening question asked by Sen. Susan Collins (R-ME) of the four young mortgage traders who were involved in the Abacus deal targeted by the SEC. "In your role as a financial advisor," Collins asked each of them, "do you believe you should always act in your client's best interest?"

The traders looked confused by what sounded like a pretty simple question. Collins thought that their confusion must have been contrived and part of a strategy to chew up time. But the fact is that none of the four men she confronted with the question was a financial advisor. I know, because I am a financial advisor. I work with unsophisticated successful people who count on me to tell them what to do with their money. That's what an FA does. In any transaction, I only have one client and I always try to look after their best interests.

But these men were traders and market makers. Their clients are all sophisticated institutions that already know what they want to do with their money. Those clients come to Goldman's trading desk seeking good transactions--not advice. The question posed by Collins was a non-sequitor and completely irrelevant to their circumstances.

As a market maker, you arrange a transaction between two or more valued clients--some of whom want to buy and others who want to sell. It is guaranteed that the deal will work out well for one side and badly for the other. As a market maker in custom-designed mortgages, your job is to make sure you are providing a good and fair market--to provide liquidity and markets for otherwise illiquid securities. That's looking after everyone's best interest.

This would be a conversation worth pursuing if the goal of the hearing in the Senate was to shed real light on any aspect of the situation. The fact that virtually no Goldman clients have stepped forward to complain would also be telling, if informing the public about the issues was the real goal of all this. But we all know that this hearing was not about providing clarity or truth.

Committee chairman Carl Levin (D-MI) spent most of the lengthy inquisition repeating his concern and outrage over how wrong it is for an investment firm to package a security for sale to its clients and then make a bet that it will go down in value. But while Levin made it clear many times that Goldman and the people in front of him should be ashamed of themselves, he never suggested that any of them violated any rules or laws.

In fact by continually pointing out that we need a whole bunch of new laws and rules to make sure this kind of thing doesn't happen again, he essentially was admitting that those laws do not exist today. In other words, the people at Goldman didn't break the law because there are no laws against what they did, even if they did what he said.

A number of very smart people seem to share that assessment. During the week, great thinkers known for their objectivity and brilliance came to the same conclusion. First, Bill Clinton came out and said he isn't sure that Goldman did anything illegal. Then reporter Fareed Zakaria went further and said he didn't think Goldman broke any laws. Finally, billionaire Warren Buffett, known on and off Wall Street for his acumen, generosity, and high ethical standards, told his shareholders he was proud to be a Goldman Sachs customer and investor and he fiercely defended the company's ethics and policies.

This set of facts leads to the following question:   Are all these SEC suits and Senate inquisitions and leaked reports of the Justice Department coming down on Goldman supposed to lead to something real?  Or has it all been part of a political shell game designed to get the public to divert its attention from the real issue?

Has this entire Goldman show trial been a distraction to take everyone's eye off the ball while, armed with populist rage, the Obama administration and the Democrats in Congress set about the business of "protecting Main Street" with far more rigorous and game-changing financial regulation than they could have ever pushed through before the Goldman sideshow whipped everyone up?

Obama and the Democrats are either ideologues with tunnel vision who just don't get it or they are savvy political tacticians who have succeeded in getting everyone to keep their eye on Goldman Sachs while the real story is taking place in the financial regulation committees on Capitol Hill.

If Goldman's stock dropped 20 percent last week over concern about the SEC suit and possible criminal prosecution, it is probably a huge over-reaction. If it dropped because draconian new regulations and tax increases on investments are on the way, then it may have been justified.

I have to admit that I can't figure out which it is.

Which is the whole point of a shell game--isn't it?

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