...Archive for May 2010

Singling out Goldman Sachs

Regular readers know that I have few nice things to say about Goldman Sachs lately.

Goldman fully deserves the attention that the SEC has brought to it, and the attention that the Department of Justice may soon bring to it. The conduct that the firm is trying to defend is inexcusable, and its unwillingness to acknowledge that even more so.

However, it is unlikely that bad conduct was limited only to Goldman. The fact that others were misbehaving is no defense. A high crime rate doesn’t make burglary okay. But I fear that Goldman Sachs may have become a shield and lightning rod, deflecting scrutiny from other firms also in need of disinfection.

Financial firms are fragile in at least three different ways. They are financially leveraged, so they are vulnerable to deteriorating asset values. They fund illiquid assets with short-term money, so they are vulnerable to runs. A less widely appreciated fragility has to do with the degree to which the boundaries of the state and financial institutions blur. A financial institution that is at odds with the state is a freakish, frightening thing. It may suffer a loss of confidence for reasons that can’t be fully explained in economic terms. Famously, “no major financial firm has survived criminal charges.

I think it entirely possible that Goldman could go the way of Arthur Anderson or Drexel. If so, the firm will have no one to blame but itself.

Nevertheless, there is a danger that we will make a ritual sacrifice of Goldman and pretend to have exorcised our demons, while other firms that have engaged in similar conduct continue undisturbed. It would be a sad irony if, in single-minded pursuit of Goldman Sachs, we not only let other perps escape unscathed, but also hand them the windfall of a less competitive industry. Rather than forcing traumatic self-appraisal and reform at surviving banks, Goldman’s fall might lead managers elsewhere to congratulate themselves for savvy positioning, for playing the system. Competitors would swallow the corpse of Goldman Sachs, thinking they had eaten what they’d killed.

I have no reason to think that the government’s focus on Goldman is motivated by anything other than having discovered particularly bad conduct there. Nevertheless, the cynic in me cannot help but notice that, according to media reports, Jamie Dimon and the Obama Administration have been very close at times. Dimon’s bank, JP Morgan Chase, has much to gain from Goldman’s misfortune. The more reasonable me is sure that there is no connection, that the mere suspicion is crank conspiracy theory. Still, less-than-exemplary conduct by investment banks during the bubble was widespread. It would be comforting to see evidence that the cops on the beat are walking the Street, and not just holing up in front of Goldman Sachs. Call it avoiding an appearance of impropriety.

Usually when people accuse law enforcement of a “fishing expedition”, they are asking the police to stand down. I do not want the police to stand down. The SEC and the Justice Department should treat Wall Street the way big city cops treat “open air drug markets”, with engaged and loving attention. But instead of a “fishing expedition” we need a “trawling expedition”. There are a swarm of piranha in the swimming pool, not just one vampire squid.

Goldman Sachs may die. If it does, I will shed a tear. My feelings about the firm are not unmixed. Nevertheless, if Goldman dies, it will be the fault of its own managers, and there will be some justice in it.

But let’s not imagine that Goldman’s passing somehow redeems JP Morgan, or Deutsche Bank, or Citi, of their sins.