My take on Goldman

Fraud 8 Comments

After the events of the recent years, news of the SEC action against Goldman Sachs has not done much to help public perceptions of either the investment bank itself or of Wall Street in general.

(On April 16, the SEC announced its intention to charge the investment bank with ‘Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages.’ For a detailed background, read the SEC media release and Goldman’s response)

Here’s my two bob’s worth on all of this:

• Goldman are not (yet) guilty.

In the court of public opinion, it appears that some have made up their minds – guilty.

This viewpoint does have some logic. The SEC investigation ran for more than a year, and charges would not been have bought about in absence of a plausible case.

Nonetheless, these types of conclusions are pre-mature. For one thing, the SEC proceeded only reluctantly [apparently they were split three-two on whether to proceed (refer article)], inferring that the case is not watertight. Moreover, the case is genuinely in dispute, and only those close to the transaction in question have any idea what really went on.

Suspicion about the big end of town is natural. But by itself, it is a weak basis on which to infer guilt.

Goldman are only guilty if and when they are proven to be so in court.

• Goldman are not necessarily morally guilty.

Legally guilty or not, weren’t their actions immoral?

Not necessarily. At least not with regard to the transaction to which the SEC action relates.

It is true that Goldman did arrange a transaction whereby one of their clients (hedge fund Paulson & Co) would profit from a deterioration in the US housing market.  To many, this seems galling – Paulson stood to gain from the pain of ordinary Americans.

But there is nothing inherently wrong about this, nor are there any problems with Goldman facilitating the efforts of their client in this regard. Investors are well within their rights to bet for or against the market as they please. That’s simply part of the normal, healthy functioning of the market.

• The real problem is disclosure.

But there might be a problem in the area of disclosure.

Was information Goldman provided to ACA and IKB entirely truthful and accurate? If so, they have done nothing wrong. If not (as the SEC alleges), then their conduct was unprofessional, unethical and almost certainly illegal.

That’s what it boils down to – disclosure. Nothing more, nothing less.

(Along with Paulson and Goldman itself, ACA Capital Management and IKB were the other investors involved in the transaction to which the charges relate)

• Goldman will bounce back.

In spite of all its troubles, the $3.5 billion profit which they announced on April 20 provided a fair bit of comfort for management – profits of this magnitude tend to do that.

The announcement served to underscore an important point: for Goldman, problems associated with the allegations are manageable, serious though they are.

With around $73 billion in shareholder funds (refer article), Goldman should be able to handle any financial penalties associated with the case (investor losses totaled around $1 billion).

And damage associated with the ‘guilty’ verdict in the court of public opinion may be overstated. Provided Goldman continues to deliver the goods for clients, they won’t go away – nor will the firm’s top talent.

Therein lies the biggest danger: a loss of confidence in the firm on the part of clients themselves. But even this should be manageable and a mass exodus seems unlikely.

Goldman seems to have a history of being able to bounce back after the storms.

Though it may suffer a few bumps and scratches, it will almost certainly ride out this one pretty much intact.

8 Responses to “My take on Goldman”

  1. Brad Shorr Says:
    May 6th, 2010 at 12:15 am

    Hi Andrew, a very balanced assessment – thank you. At this point I think we’re witnessing a political witch hunt, regardless of the merits of the case. Discrediting the private sector advances the liberal political agenda now in full swing in the U.S. Discrediting GS accomplishes that in one fell swoop.

  2. Andrew Heaton Says:
    May 6th, 2010 at 7:17 am


    Whilst anger on the part of ordinary Americans about some of the practices that we’ve seen over the last few years is understandable (and justifiable – Wall Street has behaved pretty badly), there are certainly dangers when shifts in political sentiment lead to excessive regulation and the undue smothering of entrepreneurial activity.

    Whilst capitalism has its faults, it is the best system out there and your country would not be the leader it is today if you guys had not embraced the spirit of free enterprise.

  3. Fred H Schlegel Says:
    May 6th, 2010 at 12:50 pm

    It can actually improve a competitive capitalist system to see companies that have captured too much power and influence broken up into less powerful entities. The anger surrounding the Goldman situation represents the feeling that the bigs banks and financial institutions are doing well because they are so large they are writing their own rules – and those rules are taking cash out of the pockets of everyone else. I don’t know if what Goldman did was illegal, but in terms of trust their behavior makes them look less honest than a Las Vegas casino. And that is not what banks should look like.

  4. Brad Shorr Says:
    May 7th, 2010 at 12:18 am

    Andrew, I violently agree that capitalism is the best system going, but the majority of people in the U.S. do not agree – at least at the moment. With regard to Fred’s view, I’d say there’s plenty of anger to go around. This is why the government is conducting a witch hunt. I am angry as well – there have been abuses in the private sector (in recent times starting with the Enron debacle that forced hundreds of innocent people out of work in my own backyard)that have turned public sentiment against the whole notion of free markets. A responsible federal government would recognize this and try to restore confidence in markets rather than continue to stir the pot. Again: politics trumps common sense. This is a huge problem in our government on both sides of the aisle. And although I am angry at the bad apples in the private sector, I am angrier still at the federal regulators who were asleep at the wheel and worse, participating in corruption – people who were just as much if not more responsible for abuses in lending practices and the financial system in general. If our federal government could police itself halfway decently, I’d have more respect for its high minded attempts to scold private sector financial leaders.

  5. Andrew Heaton Says:
    May 7th, 2010 at 8:04 am


    Certainly, some individual firms can become too powerful, and Goldman is arguably one of those.

    Speaking of breaking companies up, I wonder how things have been going with Microsoft and the IT industry since all that action from regulators a decade or so ago. I haven’t really followed it all closely enough to comment on whether that had any significant impact (beneficial or otherwise) on the overall functioning of the industry.

  6. Andrew Heaton Says:
    May 7th, 2010 at 2:12 pm


    You’ve hit on what I feel is the most important function of government in fostering corporate social responsibility – setting the example.

    Where governments function effectively, they set positive examples and raise the bar of expectation for the private sector. Vice-versa where they do not.

    I haven’t been following the U.S. closely enough to comment on your government in this regard, but from what you say, it sounds as though things have been pretty bad in recent times.

  7. Brad Shorr Says:
    May 11th, 2010 at 9:25 pm

    Andrew, There’s quite a difference of opinion in our country about the state of government. In general, I think most Americans are fed up with extremist rhetoric and an inability to compromise or get anything done. Beyond that, there’s much division. Some think we need more government; some think less. I don’t see things changing much in the foreseeable future.

  8. Andrew Heaton Says:
    May 14th, 2010 at 8:28 am


    Debate over the appropriate size for government have been going on for a long time. I don’t think these debates will stop anytime soon.

    I guess with your government, episodes regarding bills about health care reform and climate change do serve to illustrate how difficult it can be to get things done. (Are there any other specific areas where you would like to see significant reform?)

    Nevertheless, your government still compares favorably to many governments around the world, and I would say that the U.S. is still a pretty good model for many countries to follow. I would rather have America’s problems than those faced by Thailand or Greece right now.

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