Friday, April 23, 2010

A perspective on Goldman and the SEC

It is almost a certainty that Goldman will eventually settle its case with the SEC, admitting no wrongdoing and putting the issue behind them. It is also almost a certainty that from a legal and accounting point of view Goldman has done nothing wrong. As in the Enron case there were some, not all, financial firms whose actions were in accordance with all laws, but the court of public opinion, which could be the court of law, was such that billion dollar settlements were accepted. The complexity of the transactions, media bias, and government pressure was such that the right business decision was to settle and move on.

Following all laws does not mean that Goldman's actions were especially noble, far from it. Goldman is a money making machine. This is what they were doing although it apparently did not work for them in this transaction. They are a big target and they were involved in structuring transactions that were legal but served no economic purpose other than to enrich one side of the trade or the other. CDO's turned out to be one of the major products that almost brought the whole house of cards down.

That Goldman is vigorously but politely defending themselves makes sense. To their clients some would say that Goldman provides the most attentive service in the industry, more importantly the most insightful advice, and the best execution when deals are done. To their competitors they are talented and at times vicious adversaries whose desire to win business is relentless, and whose approach is not one of industry collegiality, not even close. To their employees they are, for many, a once in a lifetime financial opportunity and for that the hours worked are often most waking ones, even down into the administrative and clerical ranks. They are an extraordinary company whether one likes them or not.

How the case evolves from here is unclear but the next big day is April 27 before Carl Levin's Senate committee. Historically Levin's primary purpose in these situations is to humiliate corporate officers. Since going before a Senate panel has no right of discovery, his aides will find documents perhaps even unknown to Goldman, take phrases or sentences out of context, and off Levin goes, "proving" guilt as charged. It will be an interesting circus if one can stomach it. What happens in this public forum may have a bearing on any possibility of a near term settlement as Goldman may not want to be seen as giving in to unprincipled tactics.

A few other observations:
---the timing of the SEC action remains suspect, regardless of comments by Obama and Geithner. Washington is a porous place and three days before Goldman earnings, just in time for getting a "financial reform" bill passed, this looks like part of a plan even if no explicit conversations or communication took place. If one more administration official denies it, then that's a certainty.
---the glee with which the enforcement action was received by Congressional Democrats and by Obama's own political operations was telling, and troubling. Shouldn't leaders be at least somewhat cautionary and disappointed when what is probably the most connected financial institution in the world, one of our own, is charged with this type of fraud. Instead they were happy as...
---the "smoking gun" in the eyes of the public as presented by the media and politicians is that Paulson was involved in choosing some or many of the securities that went into the portfolio. That does seem wrong, but there was an independent security underwriter that had final say over the transaction and both a fiduciary responsibility and a financial exposure. The historic role of investment banks is to be an intermediary between issuers and investors. They know both sides and, for example, in an equity transaction will explain to the issuer everything that needs to be done to reassure and attract the interested investors who they actively communicate with. While taking this practice to the level it reached in the CDO business doesn't look good at all, it was industry practice.
---This deal was done between highly trained "sophisticated" institutional investors before, just before really, the market had begun to tank. All information on every security in the CDO was provided to investors and no one's arm was twisted, or at least that's the way it seems from here. This is not mortgage brokers hoodwinking homebuyers and passing the trash on to Wamu or Countrywide who didn't care where the product came from.

If anybody has read this far, the feeling here is just get this behind us, pass a financial reform bill that is reasonable, preserve a strong but leaner financial system that is globally competitive, and stop playing scapegoat.

And hey Mr.Government, what about Fannie and Freddie, your creations that Congress oversees, those companies in the center of regurgitating more than half of the bad product and with executives receiving Wall Street salaries for running a government guaranteed business that was mostly back office operations. They're still standing and you forgot to mention them. And yesterday you bemoan the plight of retirees but fail to mention that government policy has stripped away any yield on their assets with a policy that is ongoing. Congress and the adminstration are right to look at reform and point out errors, but why not be forthright about their own as well. Wouldn't it be cool if they would correct them.


Anonymous Anonymous said...

This comment seems like you are mostly defending Goldman Sachs. I did not expect that. Would you buy Goldman stock now that it has dropped since you seem to like the company.

4:25 PM  
Blogger John Borden said...

In answer to the question, I own a long held modest position in Goldman and, despite the recent price decline, I am not brave enough to add to it until this chaos subsides.

7:38 AM  

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