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The New York Times


What Goldman's Conduct Reveals

April 16, 2010

By Nicole Gelinas

The government’s charges against Goldman and its employees—if true—are not shocking. People lie. The Securities and Exchange Commission can do better at enforcing the laws that make liars think twice. But policing fraud cannot be our first line of defense against financial excess.

The S.E.C. says that Goldman, in early 2007, told mortgage-bond buyers that the consultant who helped create their securities had their best interests at heart. The consultant was taking advice, at Goldman’s behest, from another investor who would profit when the securities went bust.

Synthetic collateralized debt obligations are hard, but dishonesty with clients is easy. Raking through the details of the case uproots far deeper problems, though.

First, the obscure third parties that helped Goldman and other big banks sell complex deals encouraged investors to suspend necessary skepticism.

The German bank that bought the mortgage securities, IKB Deutsche Industriebank, fancied itself a sophisticated firm. So why did it rely on a Goldman consultant, ACA Management, as a “portfolio selection agent?” And why did sophisticated investors need third parties to “insure” the securities?

Just as Bernie Madoff’s investors would have done better not to rely on advisers to tell them that Bernie was O.K., IKB would have been better off performing its own analysis of American mortgage markets.

But obscure third parties were the spawn of Washington’s bank bailouts starting in the 1980s. The expectation of government support artificially fed Wall Street growth—so there was plenty of cheap money to trickle down from the too-big-to-fail banks to the ever-more-creative little guys.

Second, applying old trading and capital rules to new financial markets would have reduced hanky-panky.

Goldman was able to “customize” securities, allegedly committing fraud under cover of the opacity that customization provided, because the securities did not trade on a public marketplace. Such a marketplace would have demanded simplicity from Goldman in creating the securities. Thousands of investors, rather than a few hand-picked third parties, could have analyzed and priced them.

The same is true in credit-derivatives markets. Opacity serves only the banks, which reap higher fees from customers who remain in the dark.

Enforcing justice is vital to markets. But Washington should help investors, too, by reducing opportunities to thwart justice. We need a return to simplicity. Congress should direct regulators to impose trading, disclosure and capital rules consistently across financial firms and instruments—so that markets can smash the repositories for secrets that imperil the economy.

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