Goldman’s Not Wrong, But Blankfein Is

by lbej

I don’t feel bad for anyone on the other side of a Goldman trade.  I know LOTS of these folks and they knew exactly what they were doing, same as the Goldman traders did.  Nobody in the market thought Goldman traders were a bunch of saints working for the benefit of the downtrodden.  Goldman is a bookmaker and Wall Street is Vegas.  Now, if they fixed games, that’s illegal and they should be prosecuted.  Hopefully that’s what the current investigation will sort out.  But if the betting is legal (it was/is) and the games aren’t fixed…oh, well.  Gamblers know the house usually wins and they bet anyway.

As for the housing market, it was a bubble, not a fraud.  Those are two different things.  In a fraudulent transaction the seller deliberately conceals known material information from the buyer–if the buyer had all the information he needed, he’d pay less or not buy at all.  In a bubble transaction, the buyer has all the information he should need to know that he’s paying too much and he pays too much anyway.  In a bubble economy fraud will occur, and there were definitely instances of fraud during the housing bubble.  But fraud occurs during an economic depression as well.  Thieves steal, and it’s illegal.  Being delusional about asset values isn’t illegal.  I understand CDOs, former SVP of market risk at a top 10 bank and all that.  Read a prospectus, or better yet, pay a lawyer to read one and summarize it for you.  But if you don’t understand CDOs, that’s okay.  Just don’t buy one.  I don’t understand guns.  If I went to a gun shop and bought a gun and tried to load it and shoot it without taking any classes or reading any manuals and I blew my foot off as a result, whose fault is it?  It’s my stupid fault.  I know for a fact that many investors who qualified as ‘sophisticated’ under securities laws bought mortgage-backed instruments without understanding the cash flow structure of those instruments even a little bit.  If you bought a PAC tranche of a CDO because you used to play Ms. Pac-Man when you were a kid, I hope you did blow your foot off.

So whatever for all the poor investors who lost out because Goldman hires a bunch of rats and it then gets a heads-up when the ship is sinking.  Hire your own rats or get the hell off the ship before it leaves port.  Blankfein, however, is making the ridiculous oblivious-but-well-compensated-CEO argument that Dick Fuld has been making for a year and a half, and that Ken Lay made almost a decade ago now.  Let me break it down for you.  You got two choices here, Mr. CEO: one, you did understand the material fraudulent or unethical behavior that occurred at your firm; or two, you did not understand.  That’s it.  You knew, or you didn’t know.  If the answer is that you did know, you’re guilty of whatever crime was committed.  If the answer is you didn’t know, then you are guilty of negligence and dereliction of your fiduciary duty to the shareholders of your company.  In the former case, you should disgorge your pay–all of it–and go to jail.  In the latter case, you should disgorge your pay but avoid jail.  Americans simply must reject the idea that Lloyd Blankfein had no idea of the enormous risks his company was taking, risks that created a multi-billion dollar loss ultimately absorbed by the US taxpayer through the bailout of AIG, AND HE STILL SOMEHOW EARNED TENS OF MILLIONS OF DOLLARS for running the company taking those risks.  He had his cake and he ate it, and then he realized he was out of cake, so he stole yours, America.