The religious readers will have to forgive me for using the Almighty’s name in vain. It was really a play on the words of Goldman Sachs Chairman and CEO, Lloyd Blankfein, cited in an interview last year.
He claimed to be doing “God’s work”. Last week was dominated by the US Senate’s 10-hour inquisition of Goldman executives over murky financial dealings that led to some of their clients losing $1 billion.
Over the years, Goldman Sachs has established a reputation for itself as the very embodiment of Wall Street itself.
In 2009, it made a profit of $1.8 billion and has already made nearly $3.5 billion in profits in the first quarter of 2010 despite the less than ideal economic conditions.
On 16th April of this year, the SEC [Securities and Exchange Commission, the American version of CMAC] filed a civil case against Goldman for fraud. By Tuesday, 4 top level employees of Goldman, 2 former employees and ‘fabulous’ Fab, as the press have taken to calling Frenchman Fabrice Tourre, whose emails have been at the centre of the case against Goldman Sachs, were explaining themselves before the Senate Permanent Subcommittee on Investigations in a 10 hour interrogation.
The accusations were that Goldman had not informed its clients that it did not believe in the financial product, collateralised debt obligations [CDOs] named ABACUS 2007-AC1 against subprime loans, that it was selling them.
The clients bought ABACUS believing that subprime mortgage lending would continue to grow. Unknown to them, Goldman had taken a short position against them, basically taken the premise that housing market and subprime lending was about to tank and that one of it’s clients, Paulson & Co, had picked the worst mortgages it could find for the ABACUS and had similarly made a bet against its success.
As we all know now, the subprime mortgage markets collapsed. Goldman’s clients lost about $1 billion, a bill footed by taxpayers in the UK and Germany, while Paulson gained the same amount.
The legal question was whether Goldman had violated an obligation to disclose to its clients that it thought ABACUS was a bad deal and that Paulson had arranged the product and then bet against it too.
From everything, I have read, it would appear that Goldman did nothing illegal. Did they do something immoral?
Probably. Although given that the only moral on Wall Street is the bottom line so by the trading mores of the industry they may not have acted immorally. Goldman executives told the angry Senators that its clients were ‘sophisticated’ and that it was assumed they had studied the products before purchasing them.
As it always is when Wall Street and the Capitol come together, everything is not as it seems. Obama and friends needed an impetus to push through financial reforms. For that to happen, firms such as Goldman, needed to be sacrificed at the alter of the financial temple.
The case against Goldman is not the strongest or even clearest and in all probability they’ll pay an out of court settlement to the SEC to avoid a protracted legal battle.
However, the public grilling and the case combined have worked to overcome Republican resistance to Obama’s financial reforms, have shown the government to be tough on the pit bosses of what has been described as ‘Casino Capitalism’ and diverted attention from the SEC’s failure to regulate the markets.
Oscar Kabbatende is a lawyer