Is anyone else failing to get very angry over the latest scandal engulfing Goldman Sachs? The world’s most-successful investment bank is in trouble again, this time over a fraud alleged by the American regulators, the Securities and Exchange Commission, over the way it sold mortgage derivatives. It may well face fines running into hundreds of millions.
But, in reality, what the Goldman case tells us isn’t that the bank may have broken the law. That remains to be seen. Nor that it can sometimes behave in a very self-interested way. It tells us something much more interesting – and a lot more threatening in the long-term. There is a witch hunt underway against big banks, both on Wall Street and in the City of London. Financial firms have lost their legitimacy to operate. They’re getting punished for the bail-outs, and for the way they went back to paying themselves huge bonuses straight afterwards. They need to start thinking a lot harder about how they can win back some measure of public acceptance – or face a slow, painful death by a thousand lawsuits.
The most striking aspect of the Goldman case is not how shockingly the bank has behaved – but how strange it is to see it being potentially punished for a deal that probably struck it at the time as pretty normal. The case itself is highly complex, but the nub of it is simple enough. Goldman created a derivative, made up of a bunch of different mortgages, that it then sold onto clients knowing it might well turn out to be a fairly rubbish deal.
Nothing in that should surprise anyone in the markets. A trade is a trade. If you buy any financial product, you have to bear in mind that someone else is selling it. That person must think it will go down in value, otherwise they’d hang onto it. But no one actually knows where markets will go next, not even Goldman. So although the investors in this product lost money, as the traders who sold it to them suspected they would, they could just as easily have made a profit. Everyone knows that. The people who bought the allegedly fraudulent derivative were all professional investors – mainly German banks, as it happens. They took a view and they lost.
Yet there has been plenty of pious commentary about how badly Goldman has behaved. The good name of Wall Street, we’re told, is being dragged through the mud. But since it didn’t have much of a name to start with, that hardly matters. Goldman is said to be suffering ‘reputational’ damage. But since the brand represents a bunch of money-grabbing workaholic sharks, who’d sell their own children for a few extra zeros on their bonus cheque, it’s hard to see how the revelation that they might have pulled a fast one on some slow-witted German bankers is going to change anyone’s opinion. Exposing Goldman as greedy and self-interested is rather like pointing out that Gordon Brown is a grumpy Scot with a quick temper. It’s hardly news.
However, what is interesting is what it tells us about the regulatory climate. It is open season on the banks. What used to be considered everyday behaviour in the markets is now deemed suspicious.
Here in Britain over the last month, the Financial Services Authority has been clamping down hard on insider trading. A series of arrests have been made. After a decade during which you were more likely to be struck by lightning on the golf course than you were to get punished for swapping a few share tips between the fairways, the law is now being enforced with a zeal that might make a London parking warden feel they were being slightly harsh. What used to be pretty normal, and fairly harmless, is now going to get severely punished. And the key change that has triggered this? Banks, along with everyone else in the financial markets, have lost all public legitimacy.
In the last two years, the financial services industry has sunk in public esteem. One American polling organisation found that it ranked only marginally higher than the tobacco industry. Given that your credit card doesn’t actually give you cancer, it is hard to see how it can sink much lower. But there should be no surprise here. During the credit crunch, a whole series of banks had to be bailed with billions of dollars, euros or pounds. The bankers went straight back to paying themselves massive bonuses as if nothing had happened. Even before that, it was clear that this was an industry that took a huge amount out of the economy without contributing much in return. Stocks haven’t generated any real returns for a decade. Most ordinary investors pay huge charges for minimal rewards. There was little evidence of the much-trumpeted financial innovation of the last decade benefiting anyone apart from the bankers.
Every business needs permission from the rest of society to operate. If it doesn’t have that, then it is in big trouble. One lawsuit will follow on from another. Regulations will pile up on top of each other, until it becomes hard to even remain in business. Goldman looks like learning that lesson the hard way. The rest of the industry should make life easier for itself. It needs to be thinking harder about finding ways of making financial services acceptable to the wider public once again. If not, expect to see a lot more legal action triggered by behaviour that used to seem normal.