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Goldman and the Rush to Judgment

I seldom comment on contentious current events, let alone those that affect clients of Thomson Reuters.  However, the intense global criticism of Goldman, Sachs prompts me to join the debate.  No sooner had the SEC surprised the firm and the market with its charges of fraud relating to the structuring and marketing of a 2007 synthetic collateral debt obligation (CDO) offering, than commentators up to and including British Prime Minister Gordon Brown fell all over themselves to convict Goldman as being “morally bankrupt.”  It just seems too easy and too politically expedient to jump on this bandwagon.

 

Perhaps the firm will eventually be found liable of these charges, although I rather doubt it.  But what happened to our prized principles of maintaining innocence prior to being proven guilty?  What is it about our media-driven society that prompts normally thoughtful observers to rush to judgment --even those who couch their indictments in the form of “well, if they did do what the SEC accuses them of, they are [morally reprehensible]?"

 

Enough already.  Goldman has 36,000 employees, among them no doubt a couple of bad apples.  Among them are also many upstanding, ethically decent mothers and fathers who deserve better than to be branded as the source of financial contagion.  I know many of them personally – they are certainly not the poor, the homeless or the oppressed, but they deserve to be judged on their merits, not condemned in a hasty trial in the court of public opinion.  Even the SEC was split 3-2 along partisan lines, which is relatively unusual in such cases.

 

Has it ever dawned on those quick to judgment that we may not yet know all the facts?   Goldman is accused of failing to disclose to the purchasers of the CDOs that Paulson & Co. intended to short these securities and had some involvement (yet not exclusive) in the selection of the underlying mortgages to which these securities related.  I imagine that the actual legal proceedings will turn on the precise nature of the obligation that an offeror may have to the sophisticated purchasers of such securities and the highly fact-specific nature of what “he said, she said” – as interpreted after the fact from the ever-present email trail.

 

These proceedings are best left to the securities and regulatory lawyers, but let’s try to relate Goldman’s alleged conduct to some less exotic commercial dealings.  Let’s imagine instead that you are a sophisticated real estate investor looking to buy a house which is located in an area that has been hit by flooding two times in the last 15 years.  The selling family is represented by a prestigious real estate agent, “Goldman Reality,” and imagine further that the sellers have confided in Goldman that they believe another flood may soon occur and that in addition to selling their house, the sellers will be placing legal bets in Las Vegas which will pay them millions if another flood occurs within a year of selling their house to you.

 

Of course, the terrible flood occurs.  Do you bring fraud charges against the real estate agent or do you rely on federal flood insurance to bail you out (as of course the sophisticated bank purchasers did in the actual Goldman case)?  Do you complain more bitterly if the selling family is subsequently lauded as a great real estate speculator or flood predictor? Let’s all remember that when the actual CDO offering was made in 2007, John Paulson was not recognized to be the great investor he is seen as today. 

 

Goldman does not need me to defend them – they have far better lawyers on retainer.  But when most of the world is ready to convict and condemn before trial, my sense of fairness suggests we should suspend judgment until the full story emerges. 

Published Thursday, April 22, 2010 9:33 AM by Tom Glocer

Comments

 

Dolly said:

Mr. Glocer,

Your argument is very weak. Did not expect this from you.

April 23, 2010 7:10 AM
 

Very Loyal TR employee said:

For every job “right sourced” to India there is a mother or father who worked hard to build Thomson Reuters. The business world could be many things but fair.
April 23, 2010 7:37 AM
 

Ron said:

The bottom line of any corporation expects its leaders to make the right decision. The problem nowadays, people allow their emotions to cloud their judgment. The court of public opinion is a really harsh and unbending arena.
April 24, 2010 1:01 PM
 

Shelly said:

I am not sure why you pick this topic. We haven't seen the end yet. More is coming. It will be ugly for Goldman.
April 24, 2010 8:38 PM
 

Albert said:

Although I agree that there might possibly be a rush to judgment, the better argument to make would be...what will become of this witch hunt? Nothing...

Everybody knows what happened...the price of credit was artificially too low, making the pool deeper than it naturally should have been-a result of synthetic securities and the insufficient regulation around them.
When these securities failed, the invisible hand that should have *** slapped the bankers, went looking for a handout and can't clean up its own mess.  AND that is why there is a witch hunt...because the public are now stakeholders of this mess.
April 27, 2010 9:46 PM
 

smucoxmba said:

I'm still not seeing what Goldman did that was all that wrong.  

1)  Where is the punishment - and I mean jail time - for the loan officers who were writing and approving jumbo mortgages without any kind of documentation?  Who in their right mind gives a minimum wage ($7.25/hr)  worker a $500,000 mortgage???

2) The purchasers of these things were institutional investors with their own in house analysts, not the average schmoe on the street.  if you very stupidly buy something because you're greedy, it is that the fault of the seller?  

3) NO ONE is talking about the crisis that's coming.  The Baby Boomers are retiring to what - empty investment portfolios.  No one is certain that Social Security can take the strain so private retirement funds are critical but now they're gone.  

4) Since most institutional investors are using pension plans, why not restrict what pension plans can be invested in?  That stops 90% of the crap right there.
April 28, 2010 12:44 PM
 

JayM said:

Mr. Glocer-
Of course we live in a country that is ruled by law. But with 24 hour MSM and the blogesphere, all of the relevent facts are out there to make a decent judgement. The basic question to ask is this: Did GS withhold vital information or missrepresent Paulson's role to both IKB and ACA? The answer is painfully yes. Case closed. In the current environment it is very difficult to judge this case any differently. The sooner GS settles this case the better it is for GS.
April 28, 2010 1:59 PM
 

scottfm said:

Hate to burst your bubble there, Mr. Glocer, but your own company is doing its fair share of contributing to "our media-driven society that prompts normally thoughtful observers to rush to judgment":

http://finance.yahoo.com/news/Reuters-Staffers-Pissed-About-siliconalley-570897995.html?x=0&.v=2

[...] the Reuters wire on Tuesday alone is running 21 separate news stories, analyses, commentaries, factboxes, and graphics on the Goldman case. Reporters worked through the weekend to keep up with the latest developments. Reuters editors have decided this is a major story.
April 28, 2010 9:24 PM
 

JICC said:

. . .

Suspend judgement?

Sure.

But the head of a globally reknown news organisations seems to be suggesting we should also be suspending news coverage - including analysis.

Your convuluted arguments do nothing to build confidence in globalization or any the other "tions" advanced by organisations like Goldman Sachs.

. . .
April 30, 2010 4:15 AM
 

Boris said:

I think Mister Glocer is right. Let's be patient and let's not judge before the Court gives her sentence (we are just human beings after all), but I am afraid Shelly could be right also saying " it will be ugly for Goldman"...
Well, America, the entire world is watching you, as always. God bless you!
I hope there will be an happy end.

Boris the Swissie
April 30, 2010 11:34 AM
 

Joe said:

Mr. Glocer,

You are correct “Goldman does not need me to defend them”.
You may need to defend your own position. Do not forget you are the head of a globally renowned news organization.
May 2, 2010 9:40 PM
 

JournoMel said:

I agree with Mr. Glocer. I think Goldman Sachs has been chosen as "designated diver" - the one to take the blame (and the fall) for the world's economic woes.  Today Goldman Sachs must be wondering whatever possessed it to get into investment banking, or to go public with an IPO. I would be absolutely astonished if the powers-that-be at Goldman Sachs were not currently investigating the quickest path back to partnership. (BTW, JICC, Thomson Reuters never backs down on investigating a story. Shame on you for suggesting it!)
May 4, 2010 6:50 AM
 

David Z. said:

Goldman may be guilty of something and they may not. We're far better served focusing on our own personal responsibility.

Warren Buffet, the investor who doesn't hire investment bankers because he does his own due diligence didn't understand CDO's and even called them "weapons of mass distruction." So why are people buying instruments they don't understand in the first place? Greed. All return comes with it's associated risks.

For all the hullabaloo around Enron, what are we finding out lately? That all of this information was publicly available. There actually were people who figured it out before Enron collapsed, indeed who had a hand in exposing it that prompted the realization in the marketplace that there was no "there" there.

It's so easy to forget about the floods when they seemed to have happened long ago. Mr Schiller, the expert in the real-estate market issues fair warnings long enough before the collapse. If we didn't heed them and understand the historical fluctuations of the real-estate market, as convenient as it is to blame Goldman, from what perspective are we best served as we seek to make smarter decisions in the future? Avoiding buying financial instruments? Avoiding doing business with Goldman. I think not.

Dave Z.
May 13, 2010 10:51 AM
 

ktyler said:

Firstly, Tom, I'm really quite surprised that the ceo of a financial data services company is moving to defend a financial institution. Not only a more-than-likely customer but also a competitor to other customers. So much for fairness. While on one side you try to argue a noble "lets get all the facts first" (noble except that it assumes we will ever get all the facts), on the other side you then try to excuse the explicit accusations. So while saying we shouldn't pass judgement until we have all the facts, you then assume the facts and pass judgement yourself.

But as to your real estate analogue, Tom, yes; I do believe that it was shady, immoral, and even perhaps fraudulent for the house sellers to sell a home without providing full disclosure of their own belief in the property. The sellers, with aide of their broker, intended to mislead buyers into buying a viable property that they personally did not think was viable. Is it illegal? IANAL, but it does seem like the buyers were wronged and that the sellers were not fair dealing. If the sellers owned a house in a flood prone area, one hopes that the selling price was concomitant with the lowered value stemming from that risk.

But as an analogue, it doesn't quite work. Firstly, flood zones are nationally determined and the buyer would quickly have discovered, when their insurance numbers were crunched, that they were in a flood risk zone. Likewise, the sellers would not have been able to make a huge ROI from a bet against the house for the same reason (the bookmakers would also know that the house was flood-prone, not only by the aforementioned federal floodplain maps but by the house's history of flooding). Furthermore, the buyers would be able to do simple research to determine that the house was flood prone even if they ignored the insurance assessment. Lastly, unlike financial markets, the fact that the sellers took a bet against the house does not affect the value of the house; whereas in financial markets, betting against an instrument *does* lower the value of that instrument.

If Goldman knew that their customers' transactions were bad risks, they did a crappy and perhaps uncontractual job of not providing their customers with reasonably sympathetic guidance. And they must have had good reason to believe that the transactions were bad risks if they actually went so far as to short them.

And even if this was done by isolated cases of "bad apples" working for Goldman; as a corporate entity if it does not have effective controls and correcting actions against this practice, they are IMO culpably negligent. The whole point of incorporating is to operate collectively; it doesn't follow to then skirt blame for corporate error by selectively "uncorporating" when it suits you.
May 17, 2010 3:05 PM
 

honda said:

Sure
July 23, 2011 5:48 AM
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