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.