Feds Open Criminal Probe of Goldman Sachs

by Scott

Investment Firm “Not Surprised” as Justice Launches Investigation on Heels of SEC Civil Fraud Suit11. cbsnews.com, 4/30/10 [link]

“Not Surprised?!?”

(ok, maybe taken a little out of context)

As a long time admirer of the firm and its people, I’ve got to say that I am sad to see it come to this. Sad, but not surprised.

There is only one place for the organizing rationale of their decision making to lead and it was here.

Over the last many years, and probably enhanced and aggravated by the noted increasing use of the firm’s own capital, those at Goldman asked themselves over-and-over, and in many different guises, degrees of formality and magnitude of importance:

Should we do this Deal?

We’ll make tons of money, that’s a given, but should we?

Should we do this Deal?

And the answer came back many times:

Well, it’s not illegal to do so.

Discretion had reached the last firewall.  All other rationales for restraint had been passed.

“The best interests of Our Clients” put up some weak resistance. But as DeepAnalysis(DA) said:

It must be a horrifying realization, being a small pension fund, or a German Bank with dealings with Goldman and then realizing one day “Oh Shoot, Paulson is Goldman’s Client, I’m not their Client, It’s Paulson! And he’s on the other side of my trade!”

And again we were left with:

Well, it’s not illegal to do so.

At this point, by definition,  you are running your firm, and your industry on the borderline of criminality.  And for those tasked with ensuring the fairness of the markets, if they don’t like what you are doing? Their only option is criminal charges. By your own organizing rationale you have set it up to be the only restraint you respond to.

Further, as we all recognize, finance is a “rapidly evolving market,” and criminal laws are going to lag behind.  Where does that leave the rationale:

Well, it’s not illegal (now) to do so.

Where does that lead? It leads to more criminal charges.

How do they come back from the brink?  I don’t have the answer. And based on the tunnel vision thinking we saw from the heads of these organizations during the financial crisis and its immediate aftermath, neither do the leaders of this industry.