Afterword On Goldman

One last point:

During the upcoming defense against the SEC the leaders of Goldman will most likely be forced to disavow all knowledge of the deals under scrutiny. They will pass the buck down into the organization.

It seems Goldman’s vast profit rested either on fraud or on dumb luck. Either way: it wasn’t skill.

I don’t blame them for that. It will be their best initial line of defense.

But it sets up a nice trap.

One of the claims Goldman has made over the past year or so is that its very high level of profit – during very turbulent and difficult times – was due to its extraordinary risk management systems and techniques. This capability meant that its leadership was fully informed and thus was able to steer clear of the rocks on which less capable banks foundered.

This claim is unsustainable in the face of the ‘we didn’t know anything’ defense.

So we will be treated to the sight of Goldman’s senior managers trying to save themselves by undermining the reputation of the organization they lead.

This unedifying spectacle should lay to rest Goldman’s self-proclaimed superiority.

It seems Goldman’s vast profit rested either on fraud or on dumb luck. Either way: it wasn’t skill.

Whoops.

Addendum:

And another thing …

Goldman was informed of the SEC investigation back in July. So any claims to the contrary are simply a defense mechanism. More to the point, and a possible insight into the institutional hubris at Goldman, the company did not disclose the investigation to its shareholders. Companies subject to a ‘Wells’ notice – the communication that Goldman received from the SEC in July informing it of the investigation – are required by law to reveal the news to shareholders. The one exception being if in the judgement of management the investigation would not have a material impact on the company’s stock price.

Fast forward to last Friday when the news leaked out. Goldman’s stock dropped 12% in one day. According to the management that’s not material. Maybe not. But if the price keeps on dropping, and stays down for a while, then some of Goldman’s shareholders are bound to wonder whether the management’s judgement is all that sound.

Who is management protecting? Itself? Or the shareholders?

That could get ugly

Addendum #2:

George Brown, the British Prime Minister, who is in the middle of a bruising re-electuion bid, has tossed the Goldman scandal into the middle of the political arena by demanding an investigation by the UK FSA – their equivalent of the SEC. He referred to Goldman’s behavior as ‘morally bankrupt’.

True. If the charges stick. Very true.