Wall Street's know-it-alls can't tell right from wrong

Lloyd Blankfein, chief executive of Goldman Sachs, second from left, with Gary Cohn, Goldman's chief operating officer, center, and Al Sharpton, before President Obama's speech on financial reform.
Lloyd Blankfein, chief executive of Goldman Sachs, second from left, with Gary Cohn, Goldman's chief operating officer, center, and Al Sharpton, before President Obama's speech on financial reform. (Jin Lee/bloomberg News)
By Steven Pearlstein
Friday, April 23, 2010

I know you'll all be comforted, as I was Wednesday, by the public vote of confidence from Steve Schwartzman, chief executive of private equity giant Blackstone Group, when he said that his firm would continue to do business with Goldman Sachs and that he's never had a shred of doubt about the investment bank's ethical character.

So let me get this straight. Goldman Sachs is now relying on the character reference of a Wall Street sharpie who notoriously snookered investors into buying non-controlling shares of a private equity firm at the very moment when a credit-induced takeover bubble was about to burst.

What next? An op-ed testimonial in the Wall Street Journal from Joe Cassano, the genius who made a personal fortune negotiating all those credit-default swaps with Goldman on behalf of American International Group? Or maybe a contribution to the Goldman Sachs legal defense fund from the entire gang at New Century Financial, whose subprime loans were so effectively packaged and peddled by Goldman? Or how about one of those "Just Thinking of You" cards from the investment club at some nursing home in Florida that jumped into oil futures in the summer of 2008 based on Goldman's advice that oil was going to $200 a barrel?

Over the past week -- ever since the Securities and Exchange Commission accused Goldman of misleading investors about a "synthetic" collateralized debt obligation (CDO) it had created on behalf of a hedge fund that wanted to short the housing market -- we've been treated to a spirited defense by the investment bank and its allies:

That the sophisticated buyers of the securities were given all the information they needed to make an independent assessment of the risks involved, irrespective of whatever other information may have been withheld.

That the market was so caught up in mortgage frenzy that these investors would have purchased the securities even if they had known the motives of the people involved in structuring the package.

That the mortgages written during that period turned out to be so shoddy that it didn't really matter which ones were included in the package -- the end result would have been the same.

That Goldman itself lost nearly $100 million when it couldn't find enough suckers -- I mean buyers -- to take the other side of the wager.

And then there is my personal favorite: That everyone was doing it.

I honestly don't know whether Goldman violated Section 10(b) of the Securities Exchange Act of 1934. What I do know is that the facts outlined in the government case are a powerful and convincing reminder of Wall Street's complete and utter amorality. There, concepts like truth, justice, fairness, trustworthiness, duty of care, right and wrong are now totally without meaning. There is only buy or sell, long or short, win or lose.

The way Goldman went about creating and peddling its now-infamous Abacus CDO is of a piece with other stories of corner-cutting, truth-hedging and regulation-evading on Wall Street. Like the one about how AIG executives set up a series of phony reinsurance transactions with General Re in an effort to snooker investors and regulators into thinking it had more reserves than it really did. Or Lehman Brothers using short-term "repo" agreements at the end of each quarter to hide the amount of debt that it carried.

In his speech Thursday in New York, President Obama complained that "some on Wall Street forgot that behind every dollar traded or leveraged, there is a family looking to buy a house, pay for an education, open a business or save for retirement." What turnip truck did he just fall off? It's been decades since the old investment and banking cultures gave way to a trading culture in which the driving principle behind every dollar traded or leveraged is to use whatever advantage you have to "rip the face" off some other trader, brag about it on the interoffice e-mail and take 20 percent off the top as a bonus. Raising and efficiently allocating capital for businesses and households are mere pretexts for a financial system that is now focused on reaping profits from high-frequency trading and sales of purely speculative instruments like synthetic CDOs.

In a trading culture, because buyer and seller are both customers, the Wall Street firm owes its loyalty to neither. It's free to be loyal only to itself. And things get even more complex when firms like Goldman use their own capital to take positions without disclosing it to anyone.

The fundamental truth about Wall Street firms is that they succeed by having better information than most of their customers. They gain this edge by doing more trades, in a wider variety of markets, than most of the people they trade with. And they gain it by underwriting the securities and structuring the derivatives that are being bought and sold.

More than the skill of its traders or the brilliance of its executives, it is this information asymmetry that is the source of Wall Street's outsize profits. It is information asymmetry that allows Wall Street to preserve its oligopoly and keep upstart competitors from gaining a foothold in the market. And as the SEC has reminded us once again, it is this information asymmetry that offers opportunities to manipulate markets and pull the wool over the eyes of even sophisticated investors.

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