Since most of our legislators, bureaucrats, and White House residents have no idea what caused the Great Recession, they are itching to blame it on someone, and that “someone” is Goldman Sachs, the arch-capitalist of our time. As if fraud was the cause of all of our problems. It’s like blaming greed.

Let me first get it on the table: I am not defending Goldman Sachs. The point of this article is to defend free market capitalism which has been incorrectly branded as the villain in our economic crisis. If Goldman defrauded their clients, they should pay the price.

The information on this case is too new to evaluate, and without further analysis of the complaint and the facts, I will withhold judgment. I would like to review the Abacus 2007-AC1 prospectus or PPM and the allegations of misrepresentation and fraud before I condemn Goldman. I have analyzed similar deals in the past and I would like to compare this one to what I believe was the norm for disclosure.

It sounds bad for Goldman now, and while it may very well be all true, the government loves to trot out the juicy bits for press conferences which the press loves, such as Mr. Tourre’s email. As you all know, (i) you can’t always trust what prosecutors say and (ii) there’s always more to the story.

I also have a healthy suspicion of “economic crimes.” These are crimes not based on ethics, traditional crimes, or a violation of someones rights by the perpetrator, but are crimes “against the people” as defined by legislators or some economic czar. Not to stir up a debate here, but insider trading is one example of the government trying to create a “level playing field.” The distinguished economist Henry Manne has spent a lifetime showing why that is incorrect and irrelevant.

Yet today many pro-capitalism economic writers were quick to criticize Goldman. Mish Shedlock came out with an article today that blasted Wall Street ethics:

Sadly, this business screws the client for a fee time and time again because there is no ethics, no sense of fiduciary responsibility, and no walls on separation of duty to prevent fraud. …

You might wish to read his piece since it’s very critical.

I don’t mean to be blasé about this or be overly critical of Mish because I think he’s one of the best economics writers, but anyone who has ever worked on Wall Street knows that the first thing anyone thinks about is how much money they can make off of deals. That’s the goal, the motive, the driving force. And it’s not new. Of course that doesn’t excuse civil or criminal wrongs. But what it does mean is that you’ve got to look out for your own position and your due dil better be more than good. Caveat emptor. That’s just the way it is and everyone knows it. I am sure you are all shocked by this revelation.

Yes, there are many fine people in the business who do put their clients’ interests before their own. But so what. Do I wish that ethics were better? Of course. But don’t be surprised when in a world where people lie awake at night thinking about how to make more money, some very big players lose money in a deal.

Here is the gist of the complaint as reported in the SEC press release: … Continue reading The Goldman Thing