Goldman Goes to Washington

By Brad Thomason, CPA

 

Several Goldman Sachs executives testified before a senate committee today, answering charges that they had committed fraud related to mortgage securities.  They claimed that their actions were far from unusual or designed to take advantage of anyone.  Rather they were normal activities for entities that hedge financial risks and make markets in securities (of any type).

I wrote about this case several days ago, expressing concern over the potential for normal behaviors being recast in a sinister light, to the effect that legitimate operators get their dealings called into question by zealots who get a bad case of looks-like-a-duck mentality.

We are unfortunately going through a period in history where bad things have happened and several constituencies are on the hunt for villains.  And to the extent that there are villains about, they need to pay for whatever it is they’ve done.  But the problem with seeking is that it often leads to finding, even when there isn’t really anything there.

There is a persistent, though wrongheaded, idea that floats around, taking hold more in the collective consciousness during times of stress.  It is the idea that you can discern what someone’s intent was simply by looking at their actions.  In a soundbite world, this notion seems attractively straightforward.  But it withers under slightest scrutiny, collapsing under the weight of its own intellectual bankruptcy.  Consider the following:

“A” walks into a bank to inquire about buying an REO property.  Because A is a greedy bastard   who tries to squeeze every deal for all it’s worth, he offers a low-ball price.  The next day B walks into the bank, interested in the same property.  Because B is an extremely cautious investor who is trying to build in a large cushion for unforeseen contingencies, he offers a low-ball price.

Question: Based solely on the offers, could you tell which was which?

Here’s another:

Board member X sell his shares because he just learned from the head of R&D that the new drug is going to fail the clinical trial in spectacular fashion.  Board member Y sells his shares because his wife has just presented him with the estimate for the spectacular wedding that she has just planned for their youngest daughter.

Question:  Do you think you could tell which one was the crook just by looking at their brokerage statements?

The action alone is not enough to know why somebody did something.  To discern intent, you have to dig deeper.  But the problem with courts of public opinion is that they don‘t have much patience for digging.  I am reminded of a line from the western flick Silverado: “We’re going to give you a fair trial…followed by a first-class hanging.”

So all is fine as long as the adults remember how things work.  But when the hue and cry from John Q. Public (who, I am sad to report, is monstrously ignorant when it comes to understanding complex business and financial matters) gets loud enough, politicians and members of the media seem to get drawn in, and the courts of public opinion get scary-close to becoming the courts of the land.

Just because Goldman did something which could have been the product of an intent to deceive, it is not a proof that they were being deceitful.  To prove that, actual investigation needs to take place.  Not grandstanding on C-Span or ranting in the media.

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