Fraud On Wall Street
It is not smart to withhold vital information from a customer. It is not clever to sell something you know in advance is rotten. It is not brilliance that generates profits from rigging the game in your own favor. It is fraud.
Fraud.
Period.
What we have learned about Goldman simply reinforces the urgent need to take strong corrective action against the big Wall Street firms. They are all in on the scam. They need all to be attacked, vilified, and, if possible, carted off to jail.
A banker is someone whose most important asset used to be trust.
Customers who needed to access the financial markets, but who lacked the direct information, the skills or expertise, and the sales network relied on the professional integrity of the Wall Street banks to enable and facilitate that access. American capitalism thrived as long as Wall Street played its intermediary role efficiently – capital flowed to industry and to entrepreneurs who built companies and created the enduring wealth of the nation and produced the goods and jobs we all thrive of. Banks were a central cog in that wealth producing mechanism.
This simple model rested on the trust that existed between the banks and their clients.
Then the banks became greedy.
They realized that there was more money to be made by trading between themselves than there was in the less glamorous world of solid underwriting and client relationship building.
Wall Street gave up its traditional relationship based system of profit making and switched to a deal oriented model infested by lawyers, accountants and others hangers on who had no allegiance to their clients just an urgent need to ‘do the next deal’.
Even this need not have devolved into the fraud that now dominates Wall Street. It could have remained at least partially respectable. After all ‘the deal’ has always been a major factor on the Wall Street landscape.
But the ethical wheels came off when the short term profit motive of the bonus system became entwined with the flow of information from the clients. That information, once regarded as sacrosanct, was treated by the new bonus driven generation as a source of profit. These unrelentingly self regarding traders realized that they could turn that information into gold. Either by using it against those same customers, of simply by withholding knowledge when they identifies a gap in their customers information.
Add in a rapidly growing feeder system of shadow banks – hedge funds, bond funds, and private equity firms – all with access to vast reserves of capital, and all operating outside the antiquated and crippled regulatory system, and you inevitably tempt the bonus babies to cross their already thin ethical lines.
No amount of risk management could staunch the flow. The incentives were too powerful. The entire capitalist system had broken down and began to feed on itself.
Instead of channeling capital to industries where future profits could be made, the bankers created products and methods to keep that capital within their own system. They failed the greater good by limiting the flow of capital and syphoning off ever increasing fees for themselves. They sucked us all dry.
Instead of building a vibrant economy for all of us, Wall Street became hell bent on feathering its own nest. The rest of us paid the price in the lost jobs and lost investment that our industrial companies needed to compete against the world.
Finance became and end to itself instead of a mediating activity.
This was reflected in the surge in profits on Wall Street and the ever increasing share of the country’s total profits retained by the banks.
They totally failed.
Which meant we failed.
The end of the game only came after they over-reached. Hubris brought them low. They were exposed not simply as venal crooks, but as horribly and massively incompetent.
They misjudged marjet after market. Their own glorious self image as the epicenter of market magic collapsed in a few days when market after market froze, exposed as entirely reliant on outside support and limited information flows.
Wall Street can now be viewed as the exact antithesis of a poster child for the failed economics of market magic. It was a small, twisted, and narrow place where all the principles of market magic were not just ignored, but actively contradicted.
The system was set up to be gamed.
Clients were deliberately misled.
Lawyers, accountants and rating agencies all tapped into the flow of tainted profit. Willingly and knowingly so.
Risks were hidden.
Regulators lied to.
Books were cooked.
Toxic waste was shoveled onto balance sheets disguised as pristine quality assets.
The critical thing to bear in mind when you try to absorb this epic story is that all of this was done deliberately.
Wall Street is trapped in a humiliating mess of its own doing. It is in our interest to make the humiliation complete – those nearly 9 million unemployed Americans are testimony to the wreckage Wall Street reduced the economy to.
The trap is this: either Wall Street committed fraud on a massive scale and therefore is ethically repugnant and needs to be cleansed of its evil ways.
Or it was massively stupid and therefore needs to be cleansed of the rampant incompetence.
There is no other exit from the trap.
They were ignorant of the basics of finance. Or they were ignorant of the basics of civil society.
My guess is that they were both.
The case against Goldman may be difficult to establish in court as being criminal – although as I look at the SEC filing they seem to have a very concrete position.
But even if Goldman fights the case off, it is forever tarnished by its venality and willingness to lie to its customers for its own profit.
This latter problem for Goldman is probably the more damning.
How can a customer ever trust that firm again?
Ever?
