Goldman anger is misplaced
The day after the Securities and Exchange Commission announced its $550 million settlement with Goldman Sachs, three noted business journalists appeared on a popular current affairs TV show. They concurred that the deal was a win for Goldman since the dollar amount was surprisingly low — equal to what the firm earns in just a few weeks. They felt the SEC’s case was weak and that, legally, Goldman had done nothing wrong and would have prevailed in court.
They also agreed that people were understandably appalled by some of the firm’s conduct in the subprime mortgage crisis in light of the flood of emails and other internal company documents released by Congress and Goldman. Grasping for a way to express what was repellent about such actions, one of the writers described them as “icky.” Another airily noted that they might be seen as wrong “in some ethical, moral, or philosophical sense.”
What is remarkable is while all three pundits shared the common view that Goldman had behaved offensively, they would not say that Goldman’s behavior was “unethical” or “morally wrong.”
This reminded me of the most notorious article ever published in the Harvard Business Review — a 1968 piece by Albert Carr, a former advisor to President Truman. In it, Carr argued that business is akin to poker, where bluffing is often legal and expected. While allowing that deception in one’s personal life violates “private morality,” Carr contended that business and poker are strategic competitions whose rules permit participants to profit from misrepresentations. Indeed, he wrote, being a skilled practitioner in either endeavor requires occasional bluffing.
Carr has been rightly faulted for ignoring crucial differences between poker and most commercial interactions, where asymmetries of power and information typically give executives a distinct advantage over customers, employees, and other stakeholders. However, what about business activities that do resemble those of players in a poker game in which sophisticated investors bet against each other? Could it be that when a type of business activity is truly analogous to poker some artful moves that don’t break any laws qualify as bluffs?
The fact is, in competitive transactions where all parties have access to the same information, it’s not wholly implausible to see Carr’s argument apply to business dealings that closely approximate poker games. The Goldman Sachs deal that sparked so much public anger and prompted the SEC lawsuit fits this description.
However, Goldman took advantage of the buyers by withholding information — about how the securities had been designed — that might have deterred the buyers from taking the deals, in which they lost hundreds of millions of dollars. But, since the buyers were perfectly capable of evaluating the riskiness of the securities for themselves, it’s far from clear that Goldman owed them any further information. They were “icky” transactions, but not illegal or even unethical.
Much of the opprobrium heaped on Goldman Sachs for these transactions is misplaced. But there is something deeply wrong with an industry that has been increasingly devoted to concocting “investments” that are nothing more than high-risk gambles with the savings of millions of people.