The official investigation into the firm’s activities is pointless, says Philip Delves Broughton. Governments are too weak to punish the financial giant
I loathe Goldman Sachs as much as the next man. It’s part jealousy at the firm’s grip on the world’s treasure. Part horror at the parade of bumptious baldies who run the firm and snigger, as the CEO Lloyd Blankfein did to the Sunday Times, that they are doing ‘God’s work’. The only way to rationalise this was to recall Dorothy Parker’s quip that you can tell what God thinks of money by considering the people he gives it to.
Write a cross word about Goldman, and you can be sure to receive an email rocket from the firm’s European PR man, surname Kafka. Goldman is more a succubus than a haven of sunshine, daffodils and smiling babies. That’s how you make billions every quarter, fair weather or foul.
But I also suffer from a grudging admiration for the place. The people I know there are more likable than not, and it’s hard not to be awed by their brain power. No one who calls themselves a capitalist can fail to be impressed by Goldman’s effectiveness. They take the chaos of the world and turn it into cash flowing into their coffers. It is not easy getting that rich.
So when the American Securities and Exchange Commission announced it was investigating Goldman for fraud, I leapt from my seat, hungry for details, delighted at the prospect of both a long, hot gloat and some backstage juice on Goldman’s wizardry. The early reading was good. Goldman was alleged to have deprived investors of crucial information about a basket of collateralised debt obligations, the ‘seedy owes’ at the heart of the financial crisis.
A prized client, the hedge fund billionaire John Paulson, had paid Goldman $15 million to create this basket so he could bet against it. Paulson rightly believed the American subprime mortgage market would soon collapse and wanted an easy way to make his punt. Goldman delivered. But then they went out and sold the basket to other investors without telling them that Paulson had selected the securities on the basis of their likelihood of default. These investors, including the hapless RBS, trusted the inept ratings agencies who assured them that the underlying mortgage securities were a far better risk than they were.
There are any number of analogies to what the SEC alleges Goldman did, none of them good. It was like selling a car to an eager buyer on the basis that it passed all the official safety standards, without telling them the safety standards were useless and the manufacturer knew as much. In any sale, there are things you are obliged to disclose and things that as a person of good faith you really ought to. Goldman seems to have failed the second test. Whether that will amount to a serious legal issue is not clear. But you can be certain that the sharpest minds and claws in American law will be manning the Goldman barricades.
So why is my joy confined? Is it that I was hoping to see centi-millionaires being led off the trading floor in handcuffs, and instead got a murky disclosure case? What degree of mental and legal anguish among Goldman’s executives would have satisfied my resentment at their epic financial blessings?
The more I stewed, the clearer it became. This suit is meaningless. If a bank like Goldman was too big to fail in late 2007, it is not going to be torpedoed by the same government which bailed it out. The law will not be allowed to succeed where the markets failed — in wrecking Goldman. So what is this all about?
What this suit does is expose the desperate puniness of government. Goldman is being used by the US government in the same way an oil giant might be used by an ambitious young environmental group. To make your name, you don’t take on the opponent you might actually beat. You take on the one whose reaction will generate the most publicity. As Confucius might have said, better to prick an elephant than devour a gnat.
The response from the UK’s Financial Services Agency made this even clearer. Standing in the SEC’s shadow, the FSA squeaked, stamped its tiny foot and announced it was launching a me-too investigation into Goldman. Gordon Brown called the bank ‘morally bankrupt’.
But what use is a moral condemnation? Are we to imagine that Goldman’s bankers, many of whom have worked for government, now stare into their bathroom mirrors in South Kensington and the Upper East Side consumed with self-loathing? Did the Prime Minister’s words send them scurrying into the darkness, covered in shame? Not at all. The lights never went dark, the computers never stopped whirring and the traders, the heart of Goldman, never for a moment stopped trading.
Goldman is simply taking one for the team, for all the banks which participated in the financial circus which led to the crash. Next month, JP Morgan, Deutsche Bank, UBS and the German-Irish bank Depfa will face trial in Milan on charges that they deliberately misled the city’s government about the details of a large debt restructuring deal which has proved ruinous.
Last November, JP Morgan paid $75 million to settle an SEC suit alleging it paid bribes to officials in Jefferson County, Alabama, to keep refinancing its public debt at the expense of public services and tax payers. Then there was Goldman’s involvement in Greece’s disastrous debt refinancing programmes. Kick over a rock almost anywhere in the world, and you will find the major banks’ loan sharks running for cover.
The Goldman suit is a feeble stab at closing the cycle of greed, catastrophe, anger and revenge which began with the explosion in securitised debt and its derivatives, continued through the financial crisis and is now visible in the millions unemployed and furious. It comes as the US Congress considers tighter regulation of banks, a move aggressively opposed by Wall Street.
It is a tribute to Goldman’s success that it is being targeted. There would be no point going after the beaten-down Citibank. Goldman can take this. The day after the SEC announced its case, Goldman stock was still worth three times what it was in November 2008, when the US government had to come to its aid. Win or lose, the politicians and enforcement agencies can say they went after the biggest bully on the block. They stood up for the people against the plutocrats. The air will finally be cleared. And Goldman can go on, because we need it to just as much as we did when we bailed it out.
It may sound like Oliver Stone territory. But if anyone is capable of weaving a complex web it is Goldman. Compared to arranging Paulson’s credit derivative bet, dealing with a mere nuisance framing by the SEC is child’s play.