The Goldman Sachs Settlement: Is This Justice?

Last Updated Jul 31, 2010 5:04 PM EDT

One reason Americans are furious with financial industry executives is the sense that they're getting away with murder. AIG Financial Products ringleader Joe Cassano cripples the insurer, requiring a massive public bailout, only to waltz off $300 million richer. After capsizing Bear Stearns, two of the company's hedge fund managers are rapidly acquitted of any wrongdoing. Lehman Brothers CEO Richard Fuld remains in the investment game, humbled but seemingly unrepentant. Most recently, Goldman Sachs (GS) escapes federal prosecution with what many pundits consider to be light punishment, leaving chief exec Lloyd Blankfein to carry on doing God's work.

This scene contrasts with what happened after the savings and loan disaster, when more than 1,500 bankers, including hundreds of CEOs, went to prison. Writes former BusinessWeek editor Bruce Nussbaum in the Harvard Business Review in characterizing what he calls the Goldman settlement's "cultural symbolism":
The most central figure of the financial crisis receives a laughably small penalty from the government regulators. Lacking in credibility as well is the SEC's permitting a statement by Goldman Sachs that it was a mistake, not a calculated decision, to fail to disclose that the loans in the CDO sold to investors had been selected by a third party hedge fund that specifically chose them to short. In effect, it winked at what many would perceive to be an obvious lie.
The financial reform bill, whatever its merits, also lets bankers off the hook. No firms are broken up, no size limits imposed, no levees rebuilt between commercial and investment banking. And the U.S. economy? Still dead. We have a corpse, but no shooters.

What we do have is a counter-narrative, not to be mistaken for an alibi. Lenders, mortgage brokers, traders and others in the business didn't commit fraud, the story goes -- they just made errors in judgment. Yes, financial firms could've been more open, especially with clients, but the most they can be accused of is running off the cliff with the rest of the herd. Besides, no one could've seen the crisis coming. But even if they didn't, financial companies still had plenty of liquidity, and their risk management practices were sound.
Exhibit A in pleading innocent is to claim, as JPMorgan Chase (JPM) CEO Jamie Dimon likes to tell his daughter, that speculative bubbles are simply a manifestation of human nature, like psychosis. Exhibit B is the government's failure to tame people's animal spirits, along with doing things like encouraging Fannie Mae (FNM) and Freddie Mac (FRE) to give loans to poor people. Says one lawyer who represents Wall Street firms:
The financial crisis was the result of mistakes in judgment rather than intentional misconduct. That's the government's problem.
Arrest the usual suspects! Such self-exculpatory excuses aside, it's true that keeping financial firms (or any company) on the straight and narrow is, indeed, the "government's problem." Because to deregulate an industry -- as the feds did for the better part of 40 years, in collusion with financial firms -- is effectively to decriminalize it, notes William Black, a former financial regulator who now teaches law and economics at the University of Missouri-Kansas City.
It's deeply criminogenic. And this ideology that both [political] parties are dominated by that says -- "No, big corporations wouldn't cheat. Fraud can't happen. Market's automatically excluded" -- is insane. We now have the entitlement generation as CEOs. They just plain feel entitled to being wealthy as Croesus with no responsibility, no accountability. They have become literal sociopaths.

The SEC's settlement with Goldman reinforces the feeling that big financial firms' tendencies toward lawlessness are ignored, or downgraded to a lesser charge. Worse, it's dangerous.

Our banking system can't function, at least not well, if its biggest actors are permitted to wreak havoc without fear of retribution. Public morale suffers, as people lose confidence in the rule of law and in our politics. Most banks, if not Wall Street, also have a compelling interest in keeping their industry honest -- competition.

The wheels of justice turn slowly, of course. But turn they must.

Image from Flickr user Citizensheep
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  • Alain Sherter On Twitter»

    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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