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Posted by on Apr 28, 2010 in In The News, Markets, TG Roundup

Senators Gone Too Far on Goldman!

The readers of this blog know how much I love Goldman!! I watched some part of the ‘Goldman hearings’ yesterday. A lot of these senators’ populist rhetoric is utterly stupid. So stupid that even I felt some sympathy for Goldman.

Here is the simplified business model of Goldman

  • As a market maker Goldman buys and sells to and from inventory; matches buyer and seller and collects a fee
  • As a hedge fund, Goldman buys and sells for its own account

If Goldman, the market maker, sells a CDO or any other security when a client buys it, it is not illegal. It is irrelevant what Goldman thought of that security. If Goldman, the hedge fund, or Goldman’s friends short the securities which Goldman sold to clients, it is not illegal.

  • What is illegal is ‘misrepresenting material facts about that security while selling.’
  • What is illegal is ‘shorting the same security that was sold with material misrepresentation of facts.’

At the core of SEC’s case against Goldman are these two. Rather than yelling at Goldman like the Tea Baggers yelled insults at Democratic congressmen, Congress should yield – like adults – to the legal process to take its course. I am not sure if Senators did not compromise SEC’s case with their ridiculous rhetoric.

What is very clear from the testimony is that there is clear conflict of interest between Goldman units. If some company insider profits from inside knowledge, he will be prosecuted and sent to jail. This is also a clear case of inside knowledge. I have no clue how the law applied. My question is, why can’t the Government apply the same ‘insider-trading’ rules to Goldman case?

The reality is, Wall Street is a no place morality. But, there should be some basic ethical standards by which these guys operate. One of the few relevant questions I heard yesterday on the lines:

What is Goldman’s priority? Clients’ interest or its own interest.

They won’t say it, but I know what the real Goldman answer to this is.

I also know what the correct answer should be. As a all registered Professional Engineers (I am also one) are bound by one clear ethical standard.

Client’s interest above your own personal interest.