Martin Vander Weyer’s Any Other Business
There’s a distinct whiff of unfinished business about the current assault on Goldman Sachs, which stands accused of fraud by the US Securities & Exchange Commission and of ‘moral bankruptcy’ by Gordon Brown — you know, that Scottish bloke who sometimes stands on platforms quite close to Nick Clegg. When the leading Wall Street investment bank was dubbed last year ‘a giant vampire squid wrapped around the face of humanity’ by Rolling Stone columnist Matt Taibbi, the phrase resonated around the global blogosphere: everyone knew exactly what he meant. Goldman has long been regarded by many politicians, regulators and market participants (excluding, of course, those in all walks of life who made their first fortunes working for Goldman) as too powerful and arrogant for its own or anyone else’s good.
When Lehman Brothers was allowed to fail in September 2008, there was a belief in some quarters that Treasury secretary Hank Paulson, Goldman’s ex-chairman, let Lehman go partly in order to conserve bail-out ammunition for a rescue of his own former firm if needed; now allegations have surfaced that Goldman helped cripple Lehman, its fourth-ranking competitor, by short-selling Lehman shares. Whatever the truth of all that, more resentment was provoked when Goldman became the first bank to repay Paulson’s TARP (‘troubled assets relief program’) funding and to declare that it never needed help in the first place; incredulity was added to resentment when the current Goldman chief, Lloyd Blankfein, told a journalist last autumn that he was merely ‘doing God’s work’. Plans to pay out £3.5 billion in bonuses connected to this week’s announcement of bumper first-quarter profits have made matters worse. If hubris is a tradable commodity, Goldman Sachs has a dangerously long position in it.
But what of the substance of the fraud accusations, which Goldman folk dismiss as ‘political’? The bank is alleged to have colluded with the New York hedge-fund manager John Paulson in the creation of ‘synthetic collateralised debt obligations’ (CDOs, a particularly toxic form of mortgage-backed paper) that Paulson believed were likely to end up worthless as a result of subprime defaults. They duly did so, to the distress of investors who bought them — including Royal Bank of Scotland, which took an $841 million haircut. Since the strategy of Paulson (who has not been charged with any wrongdoing, by the way) was not to own the CDOs but to ‘short’ them — that is, to bet that they would crash — then the more CDOs that were created for him to bet against, and the lower the quality of mortgages behind them, the more billions he would eventually make to match the investors’ losses. Goldman, meanwhile, collected commission from both sides.
Gregory Zuckerman, in The Greatest Trade Ever, quotes the reaction of a trader at Bear Stearns (the Goldman competitor that collapsed in March 2008) when offered the same proposition: ‘It didn’t pass the ethics standards… We didn’t think we should sell deals that someone was shorting on the other side.’ Those who know Wall Street of old will say that a trade which set Bear Stearns’s moral compass spinning must have been a very dodgy trade indeed. But Zuckerman also points out that Goldman and others banks who put similar CDO deals together were only able to do so because seasoned professional investors like the people at RBS were still eager to bet that the US housing market would go on rising. It was these bulls who represented mainstream opinion, while Paulson and his ilk were regarded as contrarian mavericks.
The CDOs were in fact tailor-made to please both sides — amorally, perhaps, and without thought for the potential reputational fall-out, but I wouldn’t bet on the fraud charge sticking, even with every shiny-suited lawyer in New York touting for injured investors who might join a class action against Goldman. The lesser and non-legal charge of cynical use of excessive market power certainly will stick, however, and the clamour is rising to see the vampire squid served up as finely sliced sashimi.
Blue skies
We’ve had clear blue skies in the north this week: clear of aircraft, of course, and clear of the merest smudge that might be a cloud of volcanic ash. Is that thin layer of dust on the windscreen this morning proof that the crisis is real, or the normal residue of nature? I don’t know — and neither, apparently, does National Air Traffic Services (Nats), which has grounded air traffic day after day on the basis of ‘probability modelling’ as to where the cloud was heading and what risk it carried. Airlines say the shutdown has been a gross over-reaction, though the strength of their protests must be partly a matter of positioning for compensation claims. So who should we believe? Given corporate manslaughter and negligence law, it’s hard to imagine any airline boss, however desperate, knowingly ordering his planes to fly into mortal danger. Nats, on the other hand, is best known for the giant cock-up of its flagship centre at Swanwick, which opened years late, cost double its original budget, and was dogged with operational problems. With ministers and media breathing down its neck again, and no more than educated guesswork to rely upon rather than established science, Nats decided that extreme caution should override all other considerations. I look forward to the findings of the inevitable public enquiry.
The superhero we need
To York, for the annual court of the Company of Merchant Adventurers, an ancient guild that embodies the ideal of rampant capitalism hand in hand with social responsibility. Our prayer, once recited by medieval mercers before they set sail for Hanseatic ports, speaks of ‘bold travellers’ bringing back treasure to ‘enrich man’s life on earth’ — and this must surely be the first time in the Company’s 653-year history that our efforts in that respect have been thwarted by an Icelandic volcano. But the good news is that we have just appointed a new clerk, a former Royal Navy nuclear submarine commander with a name to suit a superhero for these strangely confused times. Financially and morally robust as it is, the Company is lucky to have bagged him — for there must be many other institutions, from the Palace of Westminster to the Vatican and Goldman Sachs, that have more urgent need of a helping hand from Captain Upright.
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