“Fraud” at Goldman

The SEC’s charge that Goldman Sachs engaged in fraud has captivated public attention, though many lawyers note that this is a legal grey area with considerable room for disagreement.  Alan Deshowitz commented on The Daily Beast:  “Securities fraud is an accordion-like term that expands and contracts over time, depending on the outrage of the public, the mood of the media, and the discretion of law-enforcement officials.”

But, he added:  “To an outsider, what Goldman was doing doesn’t pass the smell test.” (See, “The Fallacy of ‘Fraud.’”)

This suggests that, regardless of what happens in federal court, the real trial will be in the court of public opinion, and it will revolve around Goldman’s Sachs unique position as both the most successful and most reviled of financial firms.  Is it a “giant vampire squid” or a unique incubator for fiscal genius?  Are they the smartest guys around or a conspiratorial band that will stoop at virtually nothing to make a profit?

This public trial has been going on for some time now, and the balance seems to be shifting against the firm.  CEO Blankfein’s lame apologies  and their PR gestures about limiting executive salaries and are more than offset by the announcement of this quarter’s $3.5 billion profit.  While so many are still out of a job, this makes them seem like profiteers – especially since those profits don’t add to productivity or jobs.

The Dean of the Rotman School of Management, Roger Martin, comments that the kind of skimming off of profits that add no value to productivity, “will continue to march forward until the rules of the game are changed. Under the current ones, the folks who make the most money in America create zero value. . . . Yet our society rewards them most.” (See, “Goldman’s Shell Game.”)

A trial would bring out a number of facts, and that might be the most useful contribution to this debate.  It will also elicit more public discussion, keeping the issue in the forefront of our minds for a considerable amount of time.

Right now, between the demonization and the idealization, it’s hard to think straight.  The projections of evil, the envy and competition, the climate of suspicion, the extraordinary success — all these make it hard to see what’s really there.

And perhaps the real outcome will not be the jury’s verdict so much as the opportunity the trial will provide to think about the kind of financial industry we want and to move towards creating the laws and regulatory agencies that will get us there.