Goldman controversy deserves right questions
Goldman Sachs will be in the dock on Tuesday. Not in court, but in front of a U.S. Senate committee, where seven current and former employees, including boss Lloyd Blankfein and the self-styled Fabulous Fabrice Tourre, will appear. The danger is that the hearing becomes consumed with grandstanding and headline-grabbing hectoring. For past missteps to be avoided, more thoughtful probing is called for. Here are three possible icebreakers.
1. Would you do the Abacus deal again? The Securities and Exchange Commission has sued Goldman and Tourre for securities fraud, a charge the firm vigorously disputes. The deal in question is a synthetic collateralized debt obligation sold in early 2007, one of a series called Abacus. This complex beast was created primarily to allow Paulson & Co, a now-famous hedge fund, to bet against U.S. subprime mortgages. In hindsight the whole structure looks sketchy. Even Blankfein, in written testimony prepared for Tuesday’s hearing, concedes that Goldman needs to strike a better balance between clients’ trading desires and “what the public believes is overly complex and risky.”
2. Would you have sold Abacus securities to your best clients? Investment banking skeptics maintain that players in the industry, perhaps especially Goldman, treat their top customers better than others — and may sometimes short-change all of them in favor of self-interest. Blankfein says Goldman “cannot survive” if clients don’t trust the firm. In the aftermath of Abacus, investors like Calpers have expressed concern about how the firm treats its customers. As it happens, Goldman did get stuck with an Abacus holding and lost money. But would the firm have been comfortable selling the paper to its best clients?
3. If so, would you have told them more? The SEC’s legal case centers on whether Goldman should have told a buyer of the Abacus securities, German bank IKB about the involvement of Paulson. IKB may not have been a very discriminating buyer of risky mortgage-related securities. Even so, the SEC reckons Paulson’s involvement — which may have included proposing bonds to be included in the package it was betting against — was material information that should have been disclosed.
These questions don’t offer obvious sound-bites but instead aim at the mindset and ethics of investment banking near the climax of a long-running boom. What seemed OK then might not be any longer. But that’s exactly the kind of thing a crisis autopsy should uncover — so that lapses and excesses can be avoided the next time.