Criminalizing Profit: Why Goldman Sachs is Not the Real Enemy

by | Apr 29, 2010

The SEC alleges that Goldman Sachs misled its customers as to how a synthetic collateralized debt obligation was created. They do not argue that Goldman Sachs lied about the value or nature of the deal, but instead, that it had omitted and misstated facts in its disclosure documents. You would be forgiven for not knowing […]

The SEC alleges that Goldman Sachs misled its customers as to how a synthetic collateralized debt obligation was created. They do not argue that Goldman Sachs lied about the value or nature of the deal, but instead, that it had omitted and misstated facts in its disclosure documents.

You would be forgiven for not knowing the specific nature of the charge had you followed the story on cable news. The coverage I have seen, both in print and televised media, has focused on Goldman Sachs’ decision to “bet” against the housing market by helping a hedge fund profit on the other side of a CDO deal. The recent show trial before a senate committee reinforced the notion that Goldman Sach’s real crime was not taking a sufficient hit when the rug was pulled out from under the housing bubble back in 2008. Nevermind that Goldman Sachs lost $90 million on the deal.

Whatever comes of the particular punishable charge by the SEC, make no mistake that Goldman Sachs is being attacked because it had the audacity to avoid calamity and be profitable at a time when others lost money. The implication is that the moral thing for Goldman Sachs to do would have been to lose more money. Had the firm eaten a billion dollars in losses, no representative would have thought to drag them before congress and charge them with gross negligence in the loss of their clients’ and shareholders’ money. But because Goldman Sachs was savvy enough to see the crisis on the horizon, they are smeared as “fat cats” and “robber barons.”

Consider the ethical premise behind that. Carl Levin’s demagoguery is not merely meant to inspire envy of Goldman Sachs’ wealth (though that is part of the issue), but rather an attack on the right of financial companies to mitigate losses during a recession. Note that in the senator’s opening statement, he did not ask about the legality of Goldman Sach’s conduct, but whether or not it was “appropriate.” It is akin to condemning the man who took the precaution of being vaccinated and is healthy during an influenza pandemic. Morally, one should applaud his foresight, which enables him to be productive and not a parasite during a time of crisis. What would you say about the character of a village that hauls that man in for questioning and asks whether or not it was appropriate for him to get an inoculation during a time of mass sickness?

We would do well to remember that the “victims” in this case are not mom and pop investors putting their life savings on the line a la Enron or Bernie Madoff. Rather they are large European banks with an understanding of the complexity and risk of CDO’s and the subprime market comparable to that of Goldman Sachs’. Note that in the two years following the crash of the housing market, neither of the two banks involved filed a complaint against Goldman Sachs. Rather it was the SEC that found it necessary to file charges at a politically convenient time when the current administration is lacking in popularity and seeking to pass a major financial industry reform bill.

Since that bill and the Goldman Sachs case are related, I should clarify a few points. For one, I do not take a position in defense of Wall Street reflexively. If Goldman Sachs is found to have deliberately misled anyone then it should be penalized accordingly. There is much to criticize about the conduct of not only Goldman Sachs, but many large investment banks and firms, particularly those tied to the federal government. People forget how much the current administration and ruling political party are in the pocket of these very same companies, and we should feel revulsion at the incestuous relationship between Wall Street and Washington. “Too big to fail,” the fascist concept that incentivizes irrational risk-taking on the part of private companies provided they are big enough to drag innocent people down with them, is the sole prerogative of politicians. As much as Wall Street benefits from government intervention, it cannot take the lion’s share of the blame, as it is congress that appropriates and doles out our money to the unscrupulous.

This point cannot be overstated: The housing crisis of 2008 and the recession are products of political mismanagement, not Wall Street fat cats. It was government that coerced banks into loaning billions in the form of mortgages to unstable home-buyers whom no lender would have touched with a 39 and a half foot pole otherwise. It was government that, through the federal reserve, manipulated interest rates throughout the 90’s and 00’s to keep the housing orgy swinging. It was government that spent away the wealth of the internet age on unsustainable entitlements, bungled adventures in the Middle East, and Alaskan bridges to nowhere. It is government that is spending still more on the harebrained stimulus package, bailouts for GM and Chrysler (the former recently demonstrating mind-boggling cynicism with the lie that it has paid back the American people) and ObamaCare. And it is government that will bankrupt this country once socialized healthcare takes full effect, entitlements devour trillions each year, and the private sector is bled dry of every last job by a VAT, regulations, mandates, and progressive taxation.

But even more fundamentally, the blame lies with us, the American people. Congress didn’t come to power via coup d’etat; they were duly elected by us. We slept at the wheel as they raided entitlements and spent away our children’s and grandchildren’s futures. We created the irrational pie-in-the-sky culture that treats credit and debt like free money, demands everyone and anyone ought to have a two-story house in the suburbs, and treats the real estate market like a slot machine complete with HGTV shows about “flipping” homes for fun and profit. In short, we wanted to have our cake and eat it too, only now all we have are crumbs and a lot of empty bellies. When we wake up and realize that making a scapegoat of Goldman Sachs will not solve any of our problems, we may finally be on the right track. Unfortunately the class warfare card is a favorite of democrats because it works so well, and aside from the glimmer of hope that is the Tea Party, too many regular Americans have tried and convicted Wall Street out of envy and frustration.

Aaron Schavey is a policy analyst in the Center for International Trade and Economics at The Heritage Foundation (, a prominent Washington research institution. Distributed nationally by AP DataFeature Wire.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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