02 May 2010

Greedy Goldman

I havent been following the Goldman scandal particularly closely - because i generally think government tends to overreact as they look for scapegoats for their failings (lets give cheap money to everyone to buy houses whether they can afford it or not!) or after a large crisis (remember Sarbanes Oxley?). So please don't ask me to define "Abacus" or whiteboard the flow of money of the Goldman transactions. I'm also going under the assumption that Goldman didn't break the law. If they did end up doing so, then its a different post.

But as I see it - here's the crux of the issue at hand. Goldman brokered the buying of securities by their clients. Either as solely a market making intermediary, but in other instances as an advisior. And quite an expensive advisor - we're not talking about $8.95 online trades. On the other hand, they were using their own money to "short" many of these same investments they were recommending & brokering. Thus, as their clients were taking it in the shorts, Goldman was raking in lots of money through their short positions. A conflict of interest ? Absolutely. But should the government intervene ? Absolutely not (unless they truly have a case that executives broke the law).

I'd be pretty pissed if I was a Goldman client. I'd leave and go to one of the many other wall street firms that would chomp at the bit for a chance for my millions of investment dollars. Despite Goldman making all this money for me in the past, they betrayed their fiduciary obligation. Have all of their clients left ? No, not yet anyway. Goldman's stock has always outperformed its peers during the crisis (and actually stayed pretty firm during the investigation until the government announced a criminal investigation).

To me, its merely a question of channel conflict. Every industry has this conflict, and customers are always angry about it. But if they like the product or service, they seem to bite their tongue and continue as a client. Every large corporoation, for example, sells through distibutors in addition to directly to consumers. This happens everywhere, successful corporations hit a ceiling in their profit-making ability, so they go and try to capture some of their customer's profits. There was good ol' channel conflict at Goldman here. They have one side of the house trying to serve institutional clients. And the other that is trying to make a return on their own money. Neither side talks to each other, and neither side shares information with the other. Even though the two divisions rollup into corporate, they act as two separate entities. Sometimes one side does better, sometimes the other does well. Rarely do they move in the same direction. At least that's what is supposed to happen in theory.

Where was the government when my 1000 shares of CDNow.com went to $0? What about when my Citigroup preferred stopped paying dividends and fell by 98%? Why aren't they suing Al Gore and the internet for not making my investments viable ? If they are looking out for the multi-zillionaires that were betrayed as Goldman clients, what about the regular investors like you and me ? Presumably, we need the protection far more thang Goldman's informed institutional investors.

Everyone's pissed at Goldman. They made a ton of money, while the taxpayers bailed out subpar banks. Goldman didn't get the country in this mess. They didn't underwrite and package worthless residential mortgages, nor do they even loan money to homebuyers. They didn't need bailout money, rather they were forced to take it by the government. Guess who paid it back first ? So the bonuses and expontential stock grants should be meaningless to taxpayers or shareholders of other companies as long as they don't create harm to society. Is this right ? Am i missing something here ? If i'm not an investor in Goldman or I didn't have to backstop this company, why should i care how much their employees make ? Jealous, of course. A right to be? Probably not.

So let's lynch them. Its popular and easy. We as the government are highly unpopular right now with our ballooning of the entitilement system and taxes. Let's go after the bad boys that are easy to hate. Let's take away their millions of bonuses. That will show them. Show them what exactly ? You think these greedy bankers will stop being greedy. No. They'll just find another sandbox.

Why are we attacking successful corporations for being too successful ? Financial innovation (although I agree that all of this should be regulated) has kept the US as the financial center of the world. This has attracted jobs, international money, and a core strength that other countries have had a hard time replicating. By turning wall street into the EU, i don't think we're helping the country out in the long run.

If Goldman did break the law - they should be punished. Enron and Worldcom should be punished (and were). But from what I have read so far, this investigation seems like a witchhunt. If it proves to be just that, we will have tarnished the most reputed financial institution in the world. But my concern is not for Goldman, rather more about if the government goes too far and tarnishes one of the few industrial advantages that this country still maintains. Let's see how the story plays out....

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