Ethical Conflict?

The U.S. Senate Banking Committee's cross-examination today of Lloyd Blankfein was remarkable in many regards.

The most significant regard, in my opinion, is the apparent naivete or populist anger expressed by the senators, especially Chairman Levin and echoed less forcefully by Senator McCain. The naivete lies in the fundamental misunderstanding of what a business like Goldman Sachs is all about.

First and foremost, Goldman trades for their own account and their own profitability, not the profitability of their clients, is and has always been their main priority and concern.

Secondarily to this objective, Goldman creates and markets a wide variety of investment vehicles, acts as a middleman in corporate mergers and acquisitions, acts as market makers in new issues of stock, and operates a financial advisory division to manage other people's wealth, amongst other functions.

The central tenet of Levin's complaint hinges on his outrage that one division of Goldman would actively sell a security that another division might be placing bets against. I find this to be populist and naive. Not all investments that Goldman sells will go up (Goldman often simultaneously sells securities that represent opposite bets on the same position) and it is the buyer's responsibility to know what they are investing in, and why.

Just like millions of Americans bought homes near the peak in real estate values in this country (over 48% of current home loans are now "underwater"), thinking that home values would continue to rise as they had done in dramatic fashion over the preceding period, many investors actively sought exposure to the U.S. real estate market by way of the mortgage-backed securities that Goldman marketed.

The question here is whether it is morally tenable for Goldman to continue to make a market for securities that they believe are overpriced against the wishes of their clients who still maintain an appetite for these securities. I do not believe that this is an untenable position to be in. While Goldman is smart, they are be no means omniscient or omnipotent. The securities that they continue to market because of market demand, and simultaneously bet against in their own house account, could very well go up and leave Goldman's customers with a profit and Goldman with a loss.

Therefore, while Goldman's behavior on the face of it appears slimy and they appear to have their client's blood on their hands since they made money while others (including some of their clients) lost, the fact is that Goldman Sachs is in business for Goldman shareholders first and foremost, and Goldman cannot maintain an effective trading strategy if they are continuously obligated to disclose the myriad positions they hold in their house account.

This gets back to the free market premise that our government supported when people were making money but has forgotten now that people have been hurt which is LET THE BUYER BEWARE!

Lloyd Blankfein Scam Artist?

And, yeah, even Gollum seems surprised.

Well... that seems to be the gist of the SEC allegations against Goldman Sachs and Mr. Blankfein, who led GS during the period in question.

However, I doubt the SEC case is that simple and don't think the SEC can convict.

The problem that the SEC is facing is that GS was not alone in packaging Alt-A with conventional mortgages into mortgage backed securities. Either the entire industry was in collusion, or it occurred to no one that a few bad apples might ruin the bushel.

And that is going to be their primary defense. "Yes, we packaged less qualified mortgages with more conventional mortgages, but at the time the vast majority of mortgages were non-conventional in some way or another, and we were acting in a competitive marketplace where we were compelled to offer a generalized product."

So, yes they knew but, as long as equity values continued to rise, bundling alt-a with conventional loans was a low-risk proposal.

I tend to believe that the SEC is on a fishing expedition with two objectives:

1) Extract a settlement from Goldman Sachs
2) Further distance the Obama Administration from the actors who are held most centrally responsible for the current economic crisis.

And, as far as these two objective are concerned, the SEC may achieve their goals.

I just don't think they have a case.