Goldman morally, not legally guilty

The question of whether Goldman Sachs is "guilty" is a question that needs a qualifier. Are they guilty in the moral or legal sense? Were they breaking the law or simply being unethical? The Securities and Exchange Committee (SEC) certainly wants to put the proverbial noose over the Vampire Squid's neck. Vampire Squid is the endearing nickname that has recently been bestowed upon Goldman Sachs by Rolling Stone columnist Matt Taibbi. So are they guilty? This writer says "yay" to unethical, but "nay" to criminal.

These fraud allegations have emerged from a certain financial derivative known as a collateralized debt obligation (CDO). CDOs are derived from fixed-income assets like mortgages. For example, many problematic CDOs were comprised of mortgage backed securities (MBS). A portfolio of these MBSs would be created, and CDOs would be created to track the performance of this portfolio. The logic was that since housing prices were rising, these MBS portfolios would continue to gain value, and hence so would the CDOs. Of course, that did not happen, but that is a different story.

The specific type of CDO in question concerning Goldman is a synthetic CDO. With synthetic CDOs if one person makes money off of it, someone else has to lose. A lot of misinformed individuals have attacked these complex financial instruments and claimed that not even investment bankers can explain what they are.

The analogy of a horse race seems to be the easiest way to describe what happened. When two people bet differently on a horse, one person wins and another loses. Now let us say that the person betting against the horse, gets to pick which horse is running. This person is going to pick a "bad" horse. John Paulson was the horse-picker. He was an investor who rose to fame as someone who successfully anticipated the housing bubble collapsing and found a way to make money on it. Paulson was helping to put together these CDOs that Goldman was selling, and he was betting against them. Much like the horse-picker, Paulson was picking "bad" CDOs to benefit himself. Goldman claims that they showed the investors who were buying these CDOs the "horse." They could check the horse's teeth, its legs, and anything else they wanted before they placed their "bets." The only thing they did not know was that Paulson was picking the CDOs, which Goldman claims is irrelevant. Since Goldman's clients are mostly wealthy, supposedly financially literate institutions, I see nothing wrong with the Squid's actions—I have no sympathy for those European banks who did not have the wherewithal to properly analyzes the "horses" before placing their "bets."

The SEC wants to sue Goldman over the fact that they did not release Paulson's name. The SEC says that all the information should have been made public. As mentioned previously, Goldman says that is irrelevant, since all the necessary information was given to clients. Both sides do have a point, but there is not enough evidence of intent to defraud clients for the Vampire Squid to get slapped with criminal charges.

Approximately 10 percent of Goldman's operations are investments for clients. Much of the rest of Goldman's operations involve making money for itself. When the Squid went public 11 years ago, its prospectus said, "Our clients' interests always come first. Our experience shows that if we serve our clients well, our own success will follow. Our assets are our people, capital and reputation. If any of these is ever diminished, the last is the most difficult to restore." It would be hard to argue that Goldman has proven that it still fully embraces this philosophy. Goldman knowingly offered its clients "toxic assets," and then bet against those very assets. Of course, the clients were provided enough information to figure out the quality of these assets. However, that still does not vindicate the Squid from offering its clients a horse it knew was going to lose the race.

I do not think the Squid is criminally responsible for anything. However, as its own prospectus claims, reputation is of the utmost importance. While Goldman's clients were losing money, the Squid was reeling some in. It is not illegal, but it is also not the best way to treat your clients. At this point, the end results of the trial are not as important as what has already occurred. The intangible charges against Goldman are going to sting a lot worse than the real ones. There was a time when investing with Goldman Sachs was always a good idea. For a firm like that, with important institutions relying on that formerly sterling reputation to invest their money, allegations of fraud undermine the entirety of said reputation. There are plenty of competent investment firms who do not necessarily have the same prestige. Suddenly, those less famous firms may be looking a lot nicer to clients. And always remember, never trust a squid at a horse race.

-Mazi Kazemi '13