Goldman: A Leadership Ethics Dilemma

Last Updated Apr 29, 2010 8:53 PM EDT

The Goldman Sachs situation presents a leadership ethics dilemma for the ages: Is it okay for banks to bet against their customers to manage risk and hedge their bets? In fact, I'm willing to bet that opposing sides in the argument are so polarized they don't even see this as a dilemma.

The senate subcommittee that grilled Goldman executives for 11 hours yesterday clearly see what Goldman did as morally wrong, if not illegal. Contrast that with Goldman's shareholders, who probably think it unethical, if not a breach of fiduciary duty, for Goldman's executives to not hedge against a mortgage collapse.

Then again, there is a plausible middle position that says the hedging itself wasn't wrong, it was how Goldman did it that was deplorable. That, at least with respect to certain synthetic CDOs, Goldman should have disclosed its short position and possibly even details about the origins of those CDOs to customers.

Indeed, a CNBC poll seems to indicate that, at least among nearly 20,000 respondents, the answer to the question "Do you think Goldman Sachs did something wrong?" is anything but clear cut:
38% No, Goldman Sachs did nothing wrong
29% Yes, criminally and ethically wrong
23% Yes, ethically wrong
9% Yes, criminally wrong
Personally, I do think Goldman did something ethically wrong, but not for any of the reasons cited by either the SEC in its civil complaint or the Senate subcommittee. The problem I had with the Senate grilling is it sounded too much like a famous scene from the movie Casablanca.
Captain Renault: I'm shocked, shocked to find that gambling is going on in here!

Croupier: Your winnings, sir. [Hands Renault a pile of money]
The U.S. Senate's hands are anything but clean in all this. As we discussed in The Financial Crisis For Dummies, it took an entire food chain of people and institutions or, what Bloomberg columnist Mark Gilbert calls "-- a conspiracy of greed among bankers, investors, rating agencies and regulators --" to cause the mortgage and credit crisis.

Sure, banks like Goldman played a role by packaging and selling toxic assets to investors and institutions all over the world. But credit rating agencies certainly helped. And so did congressional legislators, regulators, the U.S. Treasury, the Fed, and GSEs like Fannie Mae, among others.

As for how Goldman went about selling certain synthetic derivatives, was it a conflict of interest? Probably. Should they have disclosed more? Maybe. Was it criminal? Nope. Was it unethical? I don't think so. Frankly, the customers of those instruments were big institutions that knew exactly what they were getting into and have plenty of lawyers and money to sue Goldman if they so choose.

You know what I do think is unethical? I think it's unethical for the SEC, a senate subcommittee, and the leaders of our nation to make Goldman Sachs, let alone the entire banking industry, the poster child for the mortgage crisis by pitting Wall Street against Main Street. It's disingenuous, an intentional distraction, and political grandstanding to get the public behind a financial overhaul that will leave the top half of the food chain that played a key role in the mortgage crisis intact and dysfunctional as ever.

To me, the bigger leadership ethics dilemma is this: If our legislators and regulators are hell-bent on making Wall Street the fall guy without taking a cold hard look at their own role in the mortgage meltdown, then who's going to hold them accountable? Any ideas?

Also check out:
  • Goldman's Email Problem: Why Do Execs Document Their Stupidity
  • The Financial Crisis For Dummies
  • Who's Responsible For the Financial Crisis?
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