x Abu Dhabi, UAESunday 21 January 2018

Goldman Sachs becomes fall guy for new puritans

Goldman Sachs, the bank they love to hate, is squarely in the sights of governments, competitors and litigators around the world.

Goldman Sachs, the bank they love to hate, is squarely in the sights of governments, competitors and litigators around the world. It is hard to see the "vampire squid wrapped around the face of humanity" (as the US magazine Rolling Stone famously described it) escaping without significant financial and reputational damage. Wall Street rivals (those that were left standing after the collapse of September 2008) have been muttering, and lobbying, for some time about the role that Goldman Sachs played in the meltdown.

The Greeks joined the assault when it turned out that some fancy financial engineering by Goldman has helped exacerbate their own, and ongoing, financial crisis. But last week's news from the US Securities and Exchange Commission (SEC) that it was suing the bank in a civil action for investor fraud effectively declared open season on Goldman. A deluge of similar legal actions is expected, with RBS already firing up the legal eagles over US$800 million (Dh2.93 billion) of losses it suffered, allegedly because of fraudulent transactions by Goldman.

Gordon Brown, the embattled UK prime minister, was quick to jump on the bank-bashing bandwagon again on Sunday, with an attack on Goldman's "moral bankruptcy". Well, that is something he knows plenty about. But behind the rhetoric, there are some obvious reasons that Goldman, and especially its attention-seeking chief executive Lloyd Blankfein, are under such intense bombardment. First, Goldman was the most innovative of the big Wall Street banks in devising complex financial instruments for investors. Goldman was the leading advocate of collateralised debt obligations (CDOs), the instruments backed in many cases by non-existent or worthless "trailer trash" mortgages.

In the boom years, Goldman clients could not get enough of these deals, which looked a sure-fire way to get in on the property boom without actually buying property. The CDO market back then was as unregulated as the Klondyke gold rush, and many rules were bent in the scramble to sell these products. Second, and again this is testimony to the bank's technical expertise and vision, Goldman was also the first of the big Wall Street banks to see that the boom was unsustainable, and so began to devise products that would allow investors to make money out of the looming downturn in asset values. The charge against the bank now is that its actions accelerated the collapse.

It is one thing to make money for your clients and yourself out of a rising market. It is less easy to explain to the man on Main Street how you made billions out of a market collapse that may have led to foreclosure on his home. Third, Goldman has become the victim of a new spirit of financial puritanism in the US. In his election campaign, President Barack Obama left Wall Street in no doubt that he was gunning for revenge on the "masters of the universe" for wrecking the US economy. Goldman was the most high-profile and glittering of the "masters". To take Goldman's scalp would be a real trophy for the Obama administration, and a significant boost for the administration's financial reform package.

Finally, the Goldman situation is a textbook example of how not to mould a public relations image in such circumstances. The bank blew its own trumpet over how little the crisis had affected it, how quickly it could repay federal financial assistance snapped up in the dark days of 2008, how quickly it could return to huge profits and resume enormous bonus payments. Then, in an immense PR gaffe, Mr Blankfein said the bank was "doing God's work". It was an affront to the strong religious feelings of many Americans, including Mr Obama.

The case the SEC is pushing against Goldman is pretty arcane: it amounts to an alleged conspiracy to rig the CDO market to ensure profits for Goldman clients. But what is really on trial are the years of "irrational exuberance" that led to the biggest financial crisis since the 1930s. Goldman is the fall guy. @Email:fkane@thenational.ae