Goldman anger is misplaced

July 23, 2010


The following is a guest post by Dana Radcliffe, a senior lecturer of business ethics at the Johnson Graduate School of Management at Cornell University. The opinions expressed are his own.

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.


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Well, since “there is something deeply wrong with an industry that has been…savings of millions of people” and Goldman is considered to be the preeminent firm in that industry, then the anger isn’t really misplaced, is it? Logical this argument isn’t. Who paid you to write this, Lloyd Blankenfein? George Patton

Posted by GPatton | Report as abusive

How can opprobrium be misplaced when one concocts “…investments” that are nothing more than high-risk gambles…” with millions of people. That’s like a customer thinking he’s ordering a Cadillac when talking to the salesman who really know what he’s talking about and is trusted, signs the dotted line and is actually delivered a clunker. “But it’s a car, isn’t it? That’s what we do here at Obama Car Central. We do it all the time. All dealerships, haven’t you heard? And we do it all the time.”

Posted by penman12352 | Report as abusive

Well, what’s next… should we chastise workers at fast-food restaurants because they transact in food that is completely unhealthy and make their franchises millions? Maybe we should attack car companies for not making sure that people that buy their cars know how to drive at a sufficient level?

GS pushed the envelope on their dealings a bit too far… and they paid for it dearly – let’s move on with our lives.

Posted by CDNrebel | Report as abusive

It astounds me that the author of this piece lectures on ethics.

Sachs accepted money from its clients in exchange for sound investment advise. Sachs takes advantage of their privileged position to dupe the very clients that paid for that sound advise by advising them to “invest” in a game that was already rigged against them.

If Sachs was a car dealership they would have been sued/prosecuted by now. They violated the trust placed in them by their clients. They sold their clients out in exchange for some quick profit. That is NOT ethical. It also astounds me to think that people would be taught to expect ethical behavior from corporate institutions when the only “ethic” these organizations have is to “increase shareholder value”. And if you really look even at that so called ethic, you will find that share holder got the shaft as well.

Dana, for all of your so called knowledge, how is it that you think public anger is misguided when it is the public itself that had it’s safety net destroyed in order to save the collective corporate ass. GS and other execs get huge bonuses for causing the rest of us to have to do without basic needs and we’re supposed to be okay with this?

You must be lecturing to people who don’t live in the real world where consequences must be dealt with. Corporations survive on publicly sponsored socialism, but when talk of unemployment benefit extensions arise we are told that such a thing is “socialism” and “bad” for America. You must have a Phd, (Piled Higher and Deeper).

If business is a “poker game”, then why all the BS about how companies can “trust” the Goldman, or any other institutional name? At least in a poker game all of the parties involved understand that they are each looking out for their own interests. What GS did was to instill confidence and then use that confidence to extract profit from a “gullible” client.

That’s not poker. That, is the fine art of the con. GS deserves a huge hit to its profits and its reputation. So do the others that played the same game. Banking has proven itself to be unfit as a business model. Usury leads to destruction of societal trust. But since business cares nothing about society, it makes sense they are willing to destroy it.

Posted by Benny_Acosta | Report as abusive

So. Three spineless pundits on “a popular current events TV show” failed to say what millions of people think, namely that Goldman Sachs is a global disgrace to capitalism itself… and this makes *the people* wrong?

Cornell used to be a good school. But now in the prevailing “business” climate of suck-up expediency it’s clearly taken to gambling its reputation into the sewer – just another place *not* to go if you want to learn anything worth knowing, from anybody with a conscience.

Posted by HBC | Report as abusive

One business “bluffing” another is all fine and well as long as they money gained or lost remains between those two parties.

As soon as their nefarious business dealings begin causing great financial harm to people who had no part in those transactions and who stand little or nothing to gain when one party or another wins, then the matter of right and wrong comes into play.

When several parties lose big in widespread complex transactions, that is all fine and well as long as only those involved parties incur those losses.

When the losses are shoved down the throats of ordinary taxpayers and people who nothing to gain from transactions of which they had no direct knowledge, that is something very, very wrong.

I’m not surprised that this kind of reasoning is beyond your grasp, Dana Radcliffe. None of the players on Wall Street seem to get it, either. Neither do our representatives in Washington, DC who are only giving it lip service.

I get it. The financial collapse has effected me and my family, friends and peers in a myriad of painful, negative ways. A lot of the harm that has been done in the past couple years can never be undone.

A lot of ordinary people would like to see a day of reckoning loosely based on the early days of the French Revolution.

I wonder if the greedy, amoral bastards who caused all this trouble can ever grasp that simple concept. If you finally find a way to wrap your head around it, please try explaining it to them.

Posted by breezinthru | Report as abusive

As long as the “bluffing” is within legal limits and it only effects the parties involved, most Americans will have no problem with that.

However, as a simple American citizen, I stood little or nothing to gain during the run up to the economic collapse and the financial consequences of that collapse have harmed me, my family, and my cohorts great harm that can never be undone.

The people and corporations who raked in great profits have not been punished in any real sense. They continue to do very well financially and the people in Washington, DC who should be representing the interests of people like me are instead doing everything they can to help Lloyd Blankfein and his ilk.

Many bank loans have been paid back, but no one sees Freddie Mac and Fanny May’s red ink as the responsibility of the people who caused the collapse.

The economy is still stumbling about like a skid row alcoholic while the banking industry does everything it can to shape the financial reforms in their own best interests.

My unspeakable anger is not at all misplaced.

Posted by breezinthru | Report as abusive

Let’s continue the poker analogy a bit longer.

What Goldman did was arrange the cards in the order that gave them the best hand in conjunction with a large client and then dealt those cards to pension funds and other investors as if they had been shuffled, in other words real risk.

Even then they were losing so they sent one of their players, Hank Paulson to work for gambling commission, where he worked out a deal that moved Goldman’s losses to the people watching the game, tax payers in this case, even though they had no chance to win.

They then shot one player in the head (Lehman) while breaking the kneecaps of an other (AIG).

Now does it start to make sense as to what is wrong with this picture, this would be gangster movie in real life, just cause they wear better suits than you doesn’t mean that the vampire squids aren’t corrupt and evil and deserve punishment.

Posted by jstaf | Report as abusive

Brilliant, jstaf! Outrageously entertaining! Brilliant…

and what makes it so good is that it is a lot closer to the truth than the conventional straight-shootin’, hard workin’ fellas in the white hat who just happen to be the smartest guys in the room’ image they would like us all to see.

Posted by breezinthru | Report as abusive

Well done Dana Radcliffe. It’s not a sarcasm. Contrary to the hotheads you have analysed the Abacus deal set in a (despicable) gambling environment where a zero sum transaction was executed.

A looser and a winner would emerge from transacting synthetic securities. No ‘serious’ cards were hidden under the table, i.e. as the long parties to the transaction would need to see or analyse before closing.

Talking about gangster-like methods indicate little, if any knowledge of previous gambling attitudes in the market. GS had no fiduciary duty to ACA and IKW Bank (the long parties) – two opportunistic and badly managed players, eventually loosing their shirts…. one of which led to mayhem for German tax payers and investors, but not for US tax payers.

This is not to say that GS are saints and without any negative impact on the former bubbling housing market and US pension funds’ wealth, but in other transactions. All up, GS had a very limited negative impact on the MBS market, while the big players such as Countrywide, Fannie, Freddie, Citi, Bear, Lehman and Washington Mutual, were the front runners in this bizarre circus fully supported by Alan Greenspan, Ben Bernanke, Democrats (for promoting home ownership for more people), some Republicans and indeed, by the SEC through this regulator’s lack of competence, (maybe integrity) and interest in the what they should regulate.

The Abacus case was merely a political stunt as the White House was in dire need for a case on which its current masters could build their case for new financial regulation initiatives. President Obama was scheduled to open the financial show case in New York only four days after the SEC announced the fraud case against GS.

Have a look at how out-of-money GS option puts traded the day before disclosure. Not even mad investor parties such as the ACA representatives would have bought such puts one day before expiry without some info of what was coming up the next day. Who was in possession of such info? Reportedly not the GS camp, but only people from the SEC environment. The profits made were in the thousands of per cent, while the put sellers were left with equivalent losses.

I encourage everyone to analyse the trades themselves. So, why didn’t the SEC and the NYSE launch an investigation? The answer appears to be obvious.

SEC’s fraud case was not a zero sum ‘transaction’, possessing the characteristics of a scenario where none of the parties could afford to loose the case. As such, an out of court settlement was required, all of which was evident from the outset.

The SEC would have had significant problems winning this Mickey Mouse initiative, so getting some money to the treasury without loosing face became a must.

Same for GS, as it’s loss of reputation was (and still is) significant, but unbearable for management and board should such a court ruling (in 2011 or 2012) not be heading their way…. without any distractions as to daily routines. This would have been a poker game to continue such a case in court all of which the SEC would have understood.

My business partners and I believe that GS was the best managed financial institution reducing their housing risk significantly by hedging initiatives. However, it appears that they did not hedge their exposure to AIG sufficiently, riding towards significant losses if AIG went into Chapter 11 or final bankruptcy.

We believe that the previous government made a significant error of judgement when the former GS executive Hank Paulson was left in charge in the September / October days of 2008 because of his potential conflicts of interest. Potentially, this cost the tax payers dearly and equally bad, has led to America’s declining financial market superiority in Europe and in emerging markets in Asia.

Blankfein performed in late 2008 a brilliant job from the perspective of GS’ shareholders by eliminating GS’ exposure to AIG. Who should or could blame him for doing so?

Posted by HuckleberryFinn | Report as abusive