Student Blog: Thoughts On The Law And The Legal Field
DOES GOLDMAN SACHS DESERVE MAIN STREET’S WRATH?
Since the start of the recent financial crisis questions have loomed large about Goldman Sachs’ role and involvement in the financial collapse. Perhaps the most scathing characterization of “Main Street” sentiment towards the firm was summed up by Rolling Stone editor, Matt Taibbi, when he stated “[t]he world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” Goldman has earned this reputation in part because of the shroud of secrecy that surrounds the firm. Only adding fuel to the fire, has been Goldman’s policy over the crisis to keep mum about the specifics of their dealings with AIG and the various hedge fund clients of the firm.
Perhaps the largest outrage has come from the fact that at the height of the crisis, it is asserted by many that Goldman would have gone under had the Federal Reserve not stepped in and paid off AIG’s credit default swaps at 100 cents on the dollar, and allowed the firm to borrow from the Federal Reserve at near-zero interest rates as a newly created bank holding company. Then, just a few months removed from almost having to shut its doors, in 2009 Goldman posted a $13.4 billion profit: a Wall Street record.
While there are some merits to the position of public outrage at such outlandish profits at taxpayers’ expense, much of the villainization of Goldman is due to several misunderstandings of the public at large. It is both easy and convenient to label someone as the bad guy. The image and persona of Goldman Sachs as the villain is a popular cry to wage war against the “Wall Street Elite” who have caused chaos for the rest of us.
People really are giving Goldman too much credit. In 2008 Goldman actually lost $3.1 billion on their mortgage-related positions. If the firm really knew so much about the declining mortgage market, they most certainly would have taken more aggressive positions to profit from this knowledge. Thus, the image of Goldman Sachs as the smart guys that are ripping everyone else off is an easy trap to fall into.
The firm definitely hires only the best and the brightest, but what makes Goldman Sachs, Goldman Sachs, is the firm’s ability to effectively and competently serve clients. The firm has traditionally been very client oriented, with a vision of long-term sustainability. What is cause for concern, however, is the recent trend of the firm to increase reliance on trading revenue vs. the more stable investment banking and asset management side of the business.
Now that healthcare is dealt with, at least for a short while, the Obama administration appears to have set its sights once more on financial reform. With strong support for reform from many Democrats, financial reform appears to be the next “it” topic of debate for the elections this fall. While Goldman Sachs and many other financial firms have caused a great deal of damage to our financial system, it is important not to throw the baby out with the bath water as financial reform takes place. Financial services firms clearly provide a valuable service to our economy, and Congress would be wise to not unduly damper firms’ effectiveness. Nevertheless, the important thing to keep in mind as reform takes shape is that the real enemy from the crisis is the short-term profit oriented mindset that drives so many market decisions. By placing appropriate restrictions and limitations on short term trading hazards, and working towards longer-term profitability, both firms and the government hopefully will be able to create a regulatory construct that offers more stability in the future.
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