Goldman: Did they or didn’t they?

The question is did Goldman break the law. It remains to be seen whether Goldman made misrepresentations or false claims. It's a question securities lawyers can feast on, but what about the rest of us? How do we assess exactly what went wrong and right?   The firm is under the gun of scrutiny, and its executives faced a marathon grilling session lasting more than 10 hours from Capitol Hill. The politicians and public are outraged. But what exactly did Goldman do? They profited from the collapse of the housing market, and that seems to be the primary offense that has drawn the public angst.   A review of a few facts: ·         Goldman developed financial products that allowed it to bet against the mortgage market—at least the subprime mortgage market. ·         It continued to sell clients investments that bet in favor of the mortgage market.   It is not clear that these and other actions were illegal. Based on press reports and political excoriating, it seems that Goldman's major offense was in recognizing the collapse of the subprime mortgage market before the rest of us—politicians included. While the rest of us were in denial, Goldman took steps to protect itself from the potential fallout from the overextended subprime and other loan markets. We happily pursued a policy of ignorance about being overly in debt as a society, while the investment firm hedged its bets against the excess.   Much of the roasting of Goldman misses the point that it protected itself—and therefore also protected its clients and lenders—from the housing market bubble while other firms continued to bet in favor for it. Goldman bet the bubble would burst while Lehman Brothers, Bear Stearns and Merrill Lynch bet it would continue to grow.   Somehow, it goes unnoticed in many press reports and editorials that it was the latter set of firms, particularly Lehman and Bear Stearns, that sought public and private bailouts. It was the collapse of Lehman Brothers that caused the worst damage. (Those former executives are also under legal fire.)   Perhaps Goldman should be credited, at least in part, for acting responsibly. The firm reportedly had traditionally followed a stricter risk manager system than most banks. It wanted to make sure it had enough cash on hand to pay creditors. "At Goldman we had absolutely obsessed over our liquidity position," former CEO of Goldman Sachs and former Treasury Secretary said of his management of the firm during the 1990s. The risk management scheme responsible for its current problems may simply be part of that approach.   It may be the case the firm acted illegal. That is for the Justice Department and regulations to determine. As for the court of public opinion, it is clear that the primary point of anger with Goldman is that it pursued a policy of self-interest while the nation—and the world—suffered the consequences of a major financial collapse. The firm lacked sympathy, so to speak, for the world's economic distress.   The public might be better served by taking aim at the climate of debting and betting, which appears to be both legal and necessary survival tactics in the current financial system.   ~PM   Favorite quotes on this issue:   Fareed Zakaria:  "It would be a mistake to criminalize retroactively what was standard business practice…. What this case highlights is that the old Wall Street is dead."    The Economist: "Mr Blankfein gurned incredulously at some of the senators' questions, doubtless baffled that they would characterise as immoral profiteering what he views as prudent risk management…. He argued that criticism of Goldman's motives rested on a misunderstanding of the market-making business. Marketmakers owe no fiduciary duty to clients, and offer no warranties; their responsibility, he argued, is to make sure those they serve are getting the risk exposures they seek."