I felt that the timing of the SEC’s announcement against Goldman was very curious. I couldn’t recall a similar situation in which charges against a publicly traded company were announced during the trading day. In addition, the fact that the announcement came on the Friday before financial reform was going to be debated in Congress raised the question of whether politics, not alleged wrongdoing, was driving the charges. The SEC had missed a lot—the worst financial crisis of the era, Bernie Madoff’s Ponzi scheme, and more. Was this just a way to show that there was a new sheriff in town? Was it fair? Was it even provable?
Some people were grumbling that the SEC’s suit smacked of political motivations. Later I asked SEC chairman Mary Schapiro if there was any basis to that suspicion. She denied it vigorously. “Let me just say point-blank that there was nothing political about this case. We bring hundreds of cases, every year. We’ve brought many cases coming out of the financial crisis, in fact. And we bring cases when we’re ready to bring them, not based on really any predetermined calendar or predetermined perspective.”
Still, I questioned the timing. And amazingly, when I Googled “Goldman fraud” one day, I came up with an ad for the Obama administration’s financial regulation reform, asking for a political donation. Huh? Just as the SEC was coming out with the charges, there were e-mails being sent from President Obama to his constituents saying that America needed to get moving on financial reform. As I searched “Goldman Sachs SEC” on Google, two sponsored results popped up: one from Goldman titled “Goldman Sachs Website” and one from www.BarackObama.com titled “Help Change Wall Street.”
One fact was undeniable: the charges represented a more aggressive SEC than we’d seen in a long time. That wasn’t a bad thing. But when I spoke to a number of top-notch corporate attorneys, they were unanimous in the belief that it would be very difficult for the SEC to prove such a complicated case, involving sophisticated instruments and seasoned, high-stakes investors. There wasn’t even unanimity within the SEC; the vote to bring the charges was 3 to 2.
Having said that, there was certainly an important issue of corporate ethics underlying the charges. A few days after the announcement, I was speaking to an audience of around two hundred people in New Canaan, Connecticut. The audience wanted to know if there was anything new on the Goldman Sachs story. I said quite honestly that it was too soon to know whether fraud had actually occurred. One man asked me, “If you had only one question you could ask Lloyd Blankfein right now, what would it be?”
It was an excellent question. Looking out into the sea of faces, I could tell that these ordinary Americans, many of whom had suffered tremendous losses during the financial crisis, were in no mood to give Goldman the benefit of the doubt. I answered, “I’d ask if he thought what he allowed the firm to do was appropriate behavior toward his investment clients, and was it morally ethical.” The room exploded in cheers, and that, I thought, was the heart of the matter. People wanted accountability. They felt that investment banks skirted ethics all the time, whenever it was lucrative to do so. They felt that these guys moving vast amounts of money just didn’t care. It didn’t matter whether it was true or not. Reputation is everything to an investment bank. It relies on trust, and if that trust is undermined, it can be brought down. So the SEC suit was deadly serious for Goldman Sachs.
It didn’t help that one of the vice presidents named in the fraud charge, Fabrice Tourre, sent an embarrassing, self-congratulatory e-mail to a colleague: “Only potential survivor, the fabulous Fab…standing in the middle of all these complex, highly leveraged exotic trades…” In another e-mail, he described an investment vehicle that “has no purpose, which is absolutely conceptual and highly technical,” thus confirming a public perception that high-stakes investing does nothing to support the fundamental health of the economy. Tourre became the poster boy for the arrogant, cutthroat culture of investment banking. It was not the image that Goldman Sachs needed at that moment.
On April 27, the Senate Permanent Subcommittee on Investigations, chaired by Senator Carl Levin, performed the familiar ritual of public accountability, calling a group of current and former Goldman Sachs executives, including Blankfein, to explain themselves. Such hearings are notorious opportunities for grandstanding, and those looking for illumination could hardly expect to receive any. True to form, the senators tried for eleven long hours to score points, using colorful metaphors, while the bankers ducked and weaved and labored to bury the issues in heavy layers of investment-speak.
In particular, Senator Claire McCaskell, reiterated a gambling metaphor: “You are the bookie; you are the house. You had less oversight than a pit boss in Las Vegas,” she charged. The men at the table were hard-pressed to defend themselves and were mostly unresponsive. They clearly believed that the senators had little understanding of the complexities of their business, and in some respects that was true.
A source at Goldman Sachs, who was frustrated by the tone of the hearings, told me with a note of bitterness in his voice, “These hearings are never about clarity. The senators want to tar and feather our guys. They’re looking for a scapegoat, and we’re it. It’s
