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In which I ruin my bright electoral future

Carl Levin's Senate Permanent Subcommittee on Investigations is currently interrogating some hapless Goldman Sachs employees, and Susan Collins is making them squirm by asking whether an investment bank has a duty to act in its clients' best interests. I'll take the opportunity to declare my unfitness for higher office by saying that I don't think they do, at least not in the sense that Collins is implying.

If an investment bank is structuring a trade for two clients, it has an obligation to serve its clients. That is to say, it needs to structure the trade they want to be part of and disclose all relevant information necessary for them to evaluate the trade. But if the firm, or the employees structuring this trade, think that one side is going to win and the other is going to lose, I don't think they have an obligation to warn the losers.

After all, Goldman Sachs -- and members of other investment banks -- may well be wrong, as they were for most of this crisis. There may not be internal agreement at the firm. We don't necessarily want investment banks to be the arbiters of what is a "good" or "bad" trade any more than we want Amazon telling us which television we can purchase.

The SEC's case against Goldman simply says that they failed to disclose relevant information that one side needed to decide for themselves whether going long on the Abacus deal was a good or bad trade. That is to say, the issue isn't whether Goldman acted in the client's best interest but whether they made it unnecessarily difficult for the client to act in his own best interest.

By Ezra Klein  |  April 27, 2010; 12:04 PM ET
Categories:  Financial Crisis  
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Comments

"We don't necessarily want investment banks to be the arbiters of what is a "good" or "bad" trade"


we dont?
arent "investment banks" really made out of people?
and dont some of those people set policy on standards of decency and what is ethical?
is everything all about "kramer's law?"
as long as you are making money, nothing else really matters.

the world can go to heck in a handbasket,
as long as the right pockets get lined.

i dont think it is supposed to work that way.

Posted by: jkaren | April 27, 2010 12:24 PM | Report abuse

these people deserve to go to jail.
they will all probably end up going back to their homes/compounds in nantucket, the hamptons and short hills, but they deserve to go to jail,

they were the arbiters of what was right and wrong.
they did set the policy.
they should be held personally accountable.
their crimes hurt our whole culture, not just our financial system.

Posted by: jkaren | April 27, 2010 12:29 PM | Report abuse

"they did set the policy.
they should be held personally accountable.
their crimes hurt our whole culture, not just our financial system."

At least the financial industry should pay for the damage they did to the larger economy through financial transaction and derivative trading taxes. Their reckless wagering on exotic products without the capital to back up their bets nearly created another great depression. They owe the rest of society a lot for driving the economy off a cliff.

Posted by: srw3 | April 27, 2010 12:46 PM | Report abuse

Ezra - I agree. If there are two parties that want to make a deal and Goldman writes that deal up then Goldman should not be responsible for one of the two parties’ poor deal making skills.

If, however, one of the two parties has more sway over Goldman than the other party, and that dominant party coerces Goldman into hiding certain information and/or misleading the other party, then you have a conflict of interest and a serious problem.

Or if Goldman writes up the deal and then brings it to what both parties to the deal consider an impartial third party for valuation (for instance a bond rating organization like Moody's) and then Goldman threatens to take its business elsewhere if they don't get the desired valuation, then you have a problem.

But really no publically traded company has an obligation to act in the public’s best interest. They are obligated to act in their SHAREHOLDER’S best interest, not the public’s. Indeed, if I own stock in XYZ Company and XYZ acts in a manner that doesn’t maximize shareholder value I can sue XYZ.

Posted by: nisleib | April 27, 2010 12:47 PM | Report abuse

Dear Ezra Klein,

That you are an avowed vegetarian is reason enough why you'd never win an election in this country, except perhaps in Colorado or California, and even then it'd be an uphill race for you because you also hate guns.

Thats all the opposition research I'd need to sink your candidacy!

Posted by: zeppelin003 | April 27, 2010 12:57 PM | Report abuse

"They are obligated to act in their SHAREHOLDER’S best interest, not the public’s. Indeed,"


excuse me.
the shareholder's best interest, IS also the public's best interest.
we live in a society.
we have a responsibility, whether we are ceo's, shareholders or just regular human beings.
we are all interconnected here.
so for some then, it is all about "kramer's law,"
as long as you make money, leave your conscience at the door.

did they have that as a mantra over the elevator, at goldman sachs?

it may be that way.
but it is not supposed to be that way.
and for lots of people who work hard and lead honest lives,
it is not that way.

Posted by: jkaren | April 27, 2010 1:02 PM | Report abuse

Don't worry Ezra - you can always run on the bank ticket.

Posted by: annielev | April 27, 2010 1:06 PM | Report abuse

This is like a home owner selling a beautiful golf course house without disclosing the fact that water form the fairways has been weeping into the house's foundation, causing hazardous black mold while it eats away the structure. Caveat emptor?

Goldman's actions are consistent with a 19th Century, Social Darwinist vision of trade as a zero-sum game. For me to win, you must lose. How far would that thinking go at my local grocery store? Or at my car mechanic? Or at my dentist?

Far removed from Wall Street—and the Mall in Washington—the rest of us have to get along with with the concept of mutual trade for mutual benefit. We both win because we trust the other to act honestly. Granted, not all such Main Street traders are pure of heart. But is there one investment bank on Wall Street that doesn't say "Let the suckers beware!"?

Hell, even Warren Buffet was looking for an exemption.

Posted by: tomcammarata | April 27, 2010 1:15 PM | Report abuse

nisleib,

"If, however, one of the two parties has more sway over Goldman than the other party, and that dominant party coerces Goldman into hiding certain information and/or misleading the other party, then you have a conflict of interest and a serious problem."

Did that actually happen though? I'm not sure it's true in the SEC's case. If Goldman obviously kept information from ACA that would have made ACA back away from the trade, why did Goldman take the same side of the trade? Also, why would John Paulson have more sway over Goldman than ACA? Paulson didn't have the recognition he has now back in 2007, and remember, Goldman took ACA's side of the trade.

I've also heard that ACA rejected some of Paulson's positions and substituted others, which if true hardly suggests that ACA was left in the dark by Goldman.

JKaren,

Market makers can't really be in the business of telling its clients what the 'correct' side of the trade is (as if it knew - Goldman lost money by taking ACA's side of the trade). Goldman should be neutral between clients in this scenario - that would be acting in the best interest of both.

I'm not myself a huge fan of the 'Fabulous Fab', but at this point I'm not at all convinced he deserves to go to jail.

Posted by: justin84 | April 27, 2010 1:20 PM | Report abuse

"That is to say, it needs to structure the trade they want to be part of and disclose all relevant information necessary for them to evaluate the trade. But if the firm, or the employees structuring this trade, think that one side is going to win and the other is going to lose, I don't think they have an obligation to warn the losers."

Your argument is at odds with itself. If the employees think one side is going to lose, that is relevant information necessary to evaluate the trade. Amazon releases all technical information, professional reviews and consumer reviews for its products. That is relevant information. If Amazon knowingly withholds inside information that say, a television they sell has a strong likelihood of catching fire, then of course they're obligated to disclose that and/or remove it from their website.

Posted by: roquelaure_79 | April 27, 2010 2:01 PM | Report abuse


Wry Question

Are the smartest
guys in the room

acting or actual-
ly dense?

Posted by: frank_b_ford | April 27, 2010 2:16 PM | Report abuse

roquelaure_79,

Trading isn't like buying a TV, where they are all supposed to work.

In every trade, one side makes the right call and the other side doesn't. That's part of the game. The only obligation Goldman has is to provide accurate details of the transaction under consideration.

Posted by: justin84 | April 27, 2010 3:32 PM | Report abuse

Ezra, in the future, electoral futures will be sunk almost exclusively on the extent to which a potential candidate has embarrasing stuff on Facebook (or its 3D Ultra Hypernet equivalent). Political positions will be decided by robots. Depending on the timing of your run, they may be our robot overlords.

Posted by: MosBen | April 27, 2010 3:34 PM | Report abuse

As Blankfein eloquently put it, "the act of selling something gives us the opposite position of the client." If they thought it was worth more than $X, they wouldn't sell it for $X.

Levin's questioning has been extremely weak. This is just grandstanding, and the timing of the investigation into Goldman by the SEC looks like it will prove to be a political manipulation. The Abacus deal was sufficiently disclosed.

That said, I don't think we need these huge proprietary trading desks to not report transactions to a clearinghouse. We need to be able to see more clearly what is on the balance sheets of these banks, even the i-banks so we can assess them appropriately.

Posted by: staticvars | April 27, 2010 9:59 PM | Report abuse

Ezra can read this: http://www.interfluidity.com/v2/822.html.

and then apologize for his GS apologism.

Posted by: redscott | April 28, 2010 12:10 PM | Report abuse

I think you let your analogy get out of hand. You wrote "any more than we want Amazon telling us which television we *can* purchase." Collins wasn't proposing to require investment banks to refuse to do deals. She proposed requiring them to tell their clients what they thought of the deal.

The analogy is to require that celebrities only endorse products they actually use. This has been proposed. You're too young to remember this, but it was the source of much juvenile humor when Joe Namath endorsed a brand of pantyhose.
http://www.youtube.com/watch?v=qf3oOQq9KFU

Posted by: rjw88 | April 28, 2010 7:04 PM | Report abuse

Hey Ezra:

You are ignoring a VERY significant portion of the SEC case.

You wrote: "The SEC's case against Goldman simply says that they failed to disclose relevant information that one side needed to decide for themselves whether going long on the Abacus deal was a good or bad trade."

You are focusing on the second part of the case -- its the weaker half of the case.

What you are ignoring is the stronger part of the case -- The SEC complaint states that FAb Touree told buyers of the CDO that "Paulson & Co. were long $200 million dollars" of the synthetic when they were actually short $200m or more.

That is a direct violation of Rule 10B5 -- sellers of securities cannot make material misrepresentations —

Please learn more about the legal standards when selling securities here:

10 Things You Don’t Know (or were misinformed) About the GS Case
http://www.ritholtz.com/blog/2010/04/10-things-you-dont-know-gs-case/

and here:

Questions Surrounding the SEC’s Litigation vs Goldman (April 17th, 2010)
http://www.ritholtz.com/blog/2010/04/questions-sec-litigation-vs-goldman-sachs/

Posted by: ritholtz | April 28, 2010 8:52 PM | Report abuse

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