December 27, 2007

Anyone? Anyone? Goldman?

by PG

Ben Stein seems to be on a campaign against Goldman Sachs for having shorted some of the products they were underwriting -- a maneuver that allowed Goldman to be one of the few major investment banks to avoid the damage caused by the collapse in the collateralized debt market. Merrill Lynch and Bear Stearns have required massive injections of cash from Singapore and China, respectively; Citibank's and Merrill's CEOs had to step down; Lehman Brothers took a huge loss.

Stein's complaint appears to be that in shorting CDOs while selling them to clients, Goldman failed in its fiduciary duty to avoid conflict of interest and -- not quite the same thing, though Stein glosses over the difference -- its obligation under securities law to disclose every fact or belief that might influence an intelligent, reasonable investor. It's a distinction that matters, given that the conclusion of his latest piece is,

The point is this: Donít expect the securities firms, or the securities laws, to help clients who suffered huge losses.
Basically, a crossroads was passed in the Drexel/Milken scandals. Although hundreds and perhaps thousands of men and women were profiting from misconduct, only a few people, including Mr. Milken himself, went to prison. And even he emerged from prison a very rich man (and by what I see here in Los Angeles, a model citizen). Today, in the midst of the mortgage mess, we see people breaching their fiduciary duty and getting away with it. A few may lose their jobs and wander off to a wealthy retirement. But the ordinary stockholders of the banks and mortgage companies are staggered. Entities that sought a marginally better return on their money and were sold exposure to the C.M.O.s are pauperized because of the losses. And there are reports that Wall Street is expecting $38 billion in bonuses this year.
I keep hearing well-meaning people say that America is not a nation if it doesn't have control over its borders. But are we a nation if there is no meaningful restraint on what people can do with an offering statement and a computer screen inside our borders? We surely cannot remain a republic under law if there is no law except the axiom from "Richard II" that "they well deserve to have, that know the strong'st and surest way to get."
That last paragraph is slightly absurd. A nation without a meaningful border has lost some aspect of what it means to be a state rather than merely a community; a nation without a meaningful securities law is, well, the U.S. before 1933. Perhaps what Stein is trying to say is that the enforced rule of law is not only for immigration, where it is primarily to the detriment of poor people of color, but also for securities, where it would be primarily to the detriment of wealthy white men.

However, Stein's harping on fiduciary duty problematizes this comparison, because the federal government is the only body that can enforce immigration law, whereas those to whom Goldman Sachs owed a fiduciary duty, and who feel that the duty was breached by Goldman's conflict of interest in selling securities that it was shorting, can sue on their own behalf. Enforcement is not just for the SEC. Admittedly, such civil litigation won't fulfill Stein's fantasy of seeing people in prison, but the securities laws are mostly about disclosure, not about blocking transactions entirely. Certain kinds of conflicts of interest, such as having Goldman's i-bankers influence the research analysts, will be pursued by the SEC, but others won't. If Stein's biggest problem with Goldman is that they were shorting and selling the same securities, he's right -- securities law won't help as long as Goldman did not violate the law through a failure of disclosure.

December 27, 2007 06:36 PM | TrackBack
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