Home > Economics, Finance, Politics > “Government Sachs” Eats its Cubs

“Government Sachs” Eats its Cubs

Goldman Sachs!  This past Friday, when Goldman Sachs became the first investment bank charged with securities fraud in the bubble days of the mid-2000s, my initial reaction was: “really?”  Not that I didn’t think Goldman Sachs did something wrong.  I am largely cynical about the motives and incentives that drive some of our premier financial institutions–mainly the structure that rewards short-term gains without acknowledging longer-term consequences–and I always suspected that some institution out there committed securities fraud, possibly even of the criminal variety (note that these are civil charges against Goldman Sachs), yet, somehow I never suspected Goldman Sachs of crossing the line dictated by the letter of the law.

In my eyes, I viewed Goldman as the type of institution that would err on the side of caution with regard to the letter of the law, while aggressively seeking out and capitalizing upon any room for slippage, loopholes or gray areas in the regulatory framework. Never did I expect to hear that Goldman Sachs would be the first major financial institution charged with securities fraud in the aftermath of the Great Recession.

My concern over Goldman Sachs was never Goldman specific.  It was systemic.  I believe in Mynsky’s theory of financial instability and Goldman was merely one institution in an inherently volatile system.  Despite this, Goldman enjoyed a unique aura amongst its peers.  They were particularly feared and revered relative precisely because everyone believed that they were an institution that used the law and regulations as a tool in its perpetual pursuit for profit.  This theoretically allowed Goldman to achieve higher levels of profitability than its fellow investment banks.  When Matt Taibbi labeled the bank “the giant vampire squid,” he did so not because of alleged violations of the letter of the law, but because they so firmly entrenched themselves in the mechanisms of power–their alumni included governors, secretaries, and senators, to name a few–that they played a role in shaping a beneficial legal and regulatory structure for the firm, and controlled exactly where the line would fall between legal and illegal.

While Matt Taibbi runs around his victory lap over the “Vampire Squid’s” demise, I cannot help but think that he was wrong.  This is way less bad than what his Rolling Stone article alleged.  The “Government Sachs” conspiracy theory was based entirely on the fact that Goldman was the architect of the framework through which they could profit handsomely and moreover, that the Goldman alumni in positions of power were beholden first to Goldman Sachs and second to the American people .   In one fell swoop this past Friday, the SEC destroyed the entire Goldman mystique.  Whether proven guilty or not, people will no longer view Goldman Sachs in the same light and this will have major consequences for the bank moving forward.

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    April 26, 2012 at 3:51 pm

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  1. April 19, 2010 at 9:59 am

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