If Goldman Sachs’s Clients Were Careless, So Was Goldman

One of the key tenets of Goldman Sachs’s defense against the recent charges of foul play by the Securities Exchange Commission is that its clients are big financial institutions that have the resources to do research on the financial instruments they buy from Goldman. It’s not up to Goldman to reveal every last detail about how those financial instruments are put together.

But if Goldman’s European bank clients were big enough to do their own research, how about Goldman itself? Why didn’t Goldman do the research necessary to show that all the insurance it was buying from AIG to back up its big financial bets would be worthless if the housinig market tanked? And if Goldman failed to do its homework, why should it not suffer the consequences? Goldman would not be announcing the big profitts it did yesterday, if it were not paid 100 percent on all the insurance it bought from AIG, insurance to cover its losses, insurance that we tax payers paid.

The defense that Goldman is using (the big boys can take care of themselves) should also apply to Goldman. They took a huge bet in assuming AIG would always be around. The only reason the bet worked out was that the government bailout of AIG. Goldman can’t have it both ways. If they argue that their customers should have done their homwork before buying Goldman products, the government can argue that Goldman should have done its homework before relying so much on AIG insurance.

We heard some of the same arguments after the Bernie Madoff scandal: investors should do their homework before investing. But the reality is that these investments are often too complicated to track. In the end we are forced to trust people and institutions. This, ultimately, will be what we remember after this scandal has blown away: financial institutions will be a little more hesitant to trust Goldman Sachs. It’s once-golden name has been tarnished. The more information that comes out about Goldman’s role during the housing crisis (a recent New York Times article, for example reveals that the firm was pushing instruments that bet on housing even as it was worried that the sector would implode) the worst it looks. Goldman may have brought an end to a period of innovation in the financial sector that dramatically increased the ability to raise capital while also driving up risk in the system.