Goldman Sachs was forced to put its head in the public stocks yesterday, as a US Senate subcommittee spent ten whole hours grilling some of its top brass (including CEO Lloyd ‘I’m doing God’s work’ Blankfein). But although the bank was accused of helping to bring down the financial system with its dubious mortgage products, and of misleading its clients by betting against the market it had created, they seemed in no mood to apologise. Goldman’s argument seems to be that its investors are big and ugly enough to look after themselves; if they’re willing to buy a product, that’s their problem, not Goldman’s. Maybe this doesn’t constitute fraud - but surely it’s no way to run a business?
The basic argument here is that all the dubious mortgage-backed securities created by Goldman (and others) were ultimately responsible for making the collapse as bad as it was. But the specific accusation against Goldman (as per the fraud charges lodged earlier this month) is that it created these complex products and sold them to its clients, despite knowing perfectly well that they were rubbish – the proof of which being that it betted against them with its own money and pocketed the proceeds. This allowed the bank to come out of the sub-prime crisis relatively unscathed.
But Goldman didn’t exactly don the sackcloth and ashes yesterday. In fact, Blankfein and co failed to offer any kind of apology whatsoever – about the most they’d admit to was making ‘some poor decisions in hindsight’ (this was the guy who used to run its mortgage department – like, duh). What’s more, Blankfein basically suggested it wasn’t Goldman’s job to advise its clients. As market-makers, their role was just to sell whatever their clients wanted to buy – so if they wanted exposure to the mortgage market, that’s what Goldman would give them. Even, presumably, if the investments (as in the case of the Abacus ‘synthetic CDO’ sold by Fabrice Tourre, the Goldman trader accused of fraud) turn out to be total dross.
Much of this case will presumably boil down to whether Goldman really did expect these products to fail. It doesn’t deny that it betted against them, but argues it was just hedging its position (something that every bank does to limit its losses); the senators, by contrast, claim this was a ‘big short’, not a ‘reasonable hedge’. Then there’s the issue of whether this was a co-ordinated effort to mislead, which we imagine will be tough to prove (it seems quite plausible that two bits of the bank could take a different view on the mortgage market, for instance).
This kind of high finance isn’t for the faint-hearted; Goldman’s clients are extremely sophisticated investors, and they shouldn’t expect to be molly-coddled. But we wonder if a few will take umbrage at the bank effectively admitting that it feels no obligation to guide them on the quality of their investments. Possibly to the extent that they end up taking their business to someone who has a slightly more traditional view of the term 'clients'.
In today's bulletin:
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Shell profits rise by 50% as cost-cutting begins to pay off
Our clients can look after themselves, Goldman insists
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