Goldman v. SEC: 3 Lessons for the Rest of Us
The SEC's civil suit against Goldman Sachs makes for good drama, but let's face it: It's more Clash of the Titans than Ordinary People. Goldman may be the world's easiest company to hate right now, but only from a distance. The great bankers never descend from their tower to deal with people like you and me. Its customers are hedge funds and global banks, and its wares are mind-bendingly complex contraptions like derivatives, swaps and CDOs.
Still, there's a little bit of Goldman in every financial salesperson--enough at least to remind even us ordinary people of some perennial truths about being a client in a dangerous world.
In the investing world, complexity is not your friend. It's your salesperson's friend. The investment that lost Goldman's customers $1 billion was a "synthetic" CDO, a collection of derivatives whose values were based on a whole other set of derivatives, all eventually based on a package of mortgages. Had Goldman been selling simple mortgage bonds, how likely is it that its banking customers would have needed to rely on the assurances of a 31-year-old Goldman veep, the self-styled "fabulous" Fabrice Tourre, that the investment was sound? (It's Tourre, as all the world knows, who allegedly misled the investment's biggest losers.)
Complexity is why financial salespeople love to sell regular people insurance investments. Most variable annuities, variable universal life and the like are so complicated that a clever salesperson can (without overtly lying) make them seem nothing short of miraculous. And to salespeople they are miraculous. They pay commissions that are multiples of those available on plain vanilla mutual funds. Almost every family portfolio I've looked at in my years in financial journalism had some version of these investments. It wasn't because the families woke up one day with an urge to buy a good variable universal life policy. These investments are sold.
The client always comes first, but the richest client comes firstest. I worked at Goldman Sachs early in this decade and I remember how much the company made of its culture. I never quite understood what that meant, since most of the people I worked with were recent transplants from some other firm on Wall Street or elsewhere, and the culture seemed polyglot. But the company made much of Goldman's Business Principles, the first of which was "Our client's interests always come first." That was reinforced by an employee seminar, in which we new hires were asked to put ourselves in various situations and decide on the right course of action. The right answer was always: Do what the customer thinks is right, even if you know better. (And since you worked at Goldman Sachs, it was presumed you usually did know better.)
None of the scenarios, however, would have prepared you for the situation that Tourre found himself in in the summer of 2007, in which he allegedly was asked to help one big customer take advantage of a smaller ones. According to the New York Times, Goldman's upper management signed off on the deal; if so, one has to conclude that had this scenario been part of the seminar, the correct answer was: Do what the more important customer wants, and let the smaller customer fend for himself. That's worth keeping in mind, when your broker calls. Ask yourself: why is he coming to me with this supposedly great deal and not to the big customers? It might be because the big customers didn't want it, or because it's not really a great deal.
Skepticism isn't just healthy, it's vital. Part of Goldman's defense against the SEC is that the customers were sophisticated investors who were responsible for doing their own research. In other words, our customers should have known better than to trust us. Take that to heart.
More on CBS MoneyWatch:
Can the SEC Win the Goldman Suit?
The SEC Hits Goldman: Good for the LIttle Guy?
The 5 Scariest Threats to Your Financial Future
Disclaimer: The copyright of this article belongs to the original author. Reposting this article is solely for the purpose of information dissemination and does not constitute any investment advice. If there is any infringement, please contact us immediately. We will make corrections or deletions as necessary. Thank you.
