Goldman Sachs: Masters of the Universe

The U.S. Securities and Exchange Commission (SEC) is targeting Goldman Sachs, the largest and most prestigious investment bank on Wall Street, charging it with having deliberately misinformed investors who bought securities based on the infamous sub-prime mortgages. More precisely, the SEC is charging the bank with having agreed to structure and subsequently market derivative financial products that had been secretly developed by a hedge fund founded by John Paulson (not by Henry Paulson, former United States Treasury secretary and former chairman of Goldman Sachs). John Paulson had every interest in seeing the above-mentioned products fail. The products, called Collaterized Debt Obligations (CDOs), were derived from “portfolios” of low-quality mortgages that were sold to investors.

Although it seems to be quite sophisticated and difficult to understand, the operation is in fact similar to one in which a seller puts, let’s say, chocolate, cake and a bottle of wine in a special holiday bundle. The person who buys the bundle cannot know exactly what it contains and has no information regarding the quality of the items inside, nor their expiration date. Therefore, the buyer will discover that the items he or she bought are useless only when it is already too late. Economists have spent a long time studying such cases of “information asymmetry,” in which the buyer knows less about the characteristics of the product sold than the seller and, consequently, can easily be misled. A classic example is that of the used car market, where the seller obviously possesses more information on the car sold than the buyer possibly could. Information asymmetry is one of the leading causes for the imperfect functioning of markets, and several solutions have been suggested in order to correct such imperfections, if only partially.

In the case of Goldman Sachs, however, things went beyond the regular model of information asymmetry, which investors acknowledge. The CDOs put together by the bank’s employees, at John Paulson’s suggestion, were designed to fail so that Paulson’s hedge fund could benefit from market operations directed against the very CDOs they had created. All parties involved deny that they intended to deceive investors. However, if the SEC accusations are confirmed, we will be dealing with one of the greatest frauds in the history of global finance.

Moreover, the people who blame the bankers’ greed for the economic crisis that has been ravaging the world for the past two years have an additional argument on their side. I personally do not believe that “greed” is a convincing enough explanation for large-scale phenomena such as the current crisis. It is not because greed does not play an important part in human behavior, because it does. Greed, perceived as the desire to always have more, is a characteristic of our culture and a driving force for the economy. Just like the character played by Michael Douglas in the movie Wall Street, Gordon Gekko, said: “Greed is good!” In one way or another, greed has been a factor in the creation of the great corporate empires and the amassing of the largest fortunes, from antiquity to the present. I doubt that we experienced a sudden exacerbation of greed during the years before the crisis.

A more plausible cause for what is happening today is power madness. Modern financial markets and instruments have never been as strong or as efficient as they are now. It is little wonder then that the people who operate them can get the feeling they are all-powerful and immune, because they have the ability to move billions of dollars from one part of the planet to another with the simple press of a button. This power, combined with the ambition to be noticed, to stand out from the crowd, that is harnessed in the extremely competitive international business environment, create the perfect conditions for abuse.

Fabrice Tourre, the Goldman Sachs executive director who was personally in charge of the operation currently being investigated by the SEC, wrote shortly before the securities were placed on the market: “The whole building is about to collapse any time now.” While on himself, he commented: “Only potential survivor, the fabulous Fab… standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!” These are the words of a 31-year-old, one of the many intelligent and educated Ivy League graduates hired on Wall Street, a man mad with the feeling that he is the master of the universe.