Goldman, Facebook and the SEC - Too Big to Care

The one thing you always know about Goldman Sachs is that they know exactly what they're doing.  Every step of the way.

They can say "unintended consequences" when they talk about their highly sophisticated ways of slicing and dicing bad debt and selling it off as credit default swaps.  They can even say "but it's our money" when they get 100 cents on the dollar from AIG when the US Government has just bailed out both AIG and Goldman.

They'll always have a reason - careful and considered - for what they do.  Or they just won't answer at all.  Because they don't have to.  Nothing substantive happens to them if they don't.

Even when they have to pay the US Government $550m in fines for their actions.  It's an easy out and a drop in their particular financial bucket.

And that's the real lesson of Goldman in this economic circus.  It's not just that they were considered "too big to fail."  It's that they believe they're too big to care.

That has to be at the foundation of their decision to create a special fund for their corporate and wealthy clients to buy another $1.5bn in valued at $50bn, because of Goldman's investment of $375m.

Why?  Because with the new SEC rules, there are a limited number of individual investors who are allowed to hold shares in a privately held company before it is required to go public.  By creating this new version of a special vehicle (one of Goldman's clear specialties), they end-run the rule and the SEC.  After all, if they are the ones managing the deal, it's only one investor.  Right?  Just Goldman.  It doesn't matter how many individuals are part of the fund.

Yeah, right.  And that doesn't even touch the way they ignored the Volcker Rule limiting their use of proprietary investments they can make with their own money.

Not long ago I wrote a paper for the Chartered Institute of Management Accountants on corporate reputations - why they're important and what to do about them.  (You can get a free pdf download of the report and see my launch event here.)  In it was a case study on Goldman Sachs - but, unlike the other case studies, the editors at CIMA were uncomfortable with the introductory quotation I wanted to include.  They were concerned that it would be too inflammatory for the readers.

They were the editors so, even though I protested, the quote was out.  Well, folks, here it is for your reading pleasure:
“Boy, that Timberwolf was one shitty deal” How much of that “shitty deal” did you sell to your clients after June 22, 2007?...You didn’t tell them that you thought it was a “shitty deal.”'
That comment came from Senator Carl Levin on the 27th of April 2010 during the Senate Hearings regarding Goldman Sachs' role in the economic crisis.  The "shitty deal" he's talking about - and where that reference comes from - was an internal Goldman memo.  The person he was questioning (who, at best, avoided and, at worst, obfuscated in his replies) was Daniel Sparks, Goldman's former Mortgage Department head.

So, the deal that was quoted was done in 2007.  The crash came in 2008.  The hearings were in 2010.  It's January 2011.  Nothing has changed.  Evidently because Goldman can't see any reason they have to.

And that's the saddest part of this whole thing.  Because Goldman, historically, was a truly excellent organization.  It had ethics and, because it was a partnership, there was a clear impact on the partners when the organization did something "wrong."

Since changing their business model and having gone public, the whole concept of ethics, integrity or (for pure fantasy sake) corporate social responsibility were thrown out the window.

The arguments regarding whether and to what extent regulators should become involved will continue in every country - because every business and industry wants to protect itself from being "over-regulated."

But when an industry - or organization - continues to show its contempt for the regulators, the government and the larger population that are supposed to be protected by those regulations, then it's time to say, go ahead.  You want to do shitty deals?  You want to spit in the face of the regulations - softened though they were - while you keep building your fancy vehicles to hide and cheat and steal?

You just go ahead and do that little thing.  Because we're going to come at you with everything we've got - limited as it might be.  Moreover, when the bottom falls out - which it will - we won't be there to catch you.  Not this time.  Not ever again.

Let some other financial institution that hasn't been playing fast and loose with the system benefit.

Goldman isn't inviolate.  It doesn't live in a bubble - unless our politicians and regulators allow it to live there.

Moreover, Goldman isn't the only one of its kind, nor is its particular brand of toxicity limited to the US. Every country's got them.

As business leaders, you choose with whom you do business and how.  You determine - by voting with your feet and your funds - which organizations have to live up to the same standards as you...whether because you hold yourself to them or because you have more respect for the system than this particular financial institution.

Whether it's a Goldman or any other entity, be careful who you do business with.  After all, you can just as easily find yourself on the "shitty" side of the deal as anyone else.  Even if you're convinced they would never do that to you.

Clearly, they will.