After the Securities and Exchange Commission last Friday charged America’s most respected financial firm, Goldman Sachs, with defrauding investors, CNN’s Rick Sanchez asked, “Is it OK to cheat as long as it’s not illegal?”
Goldman says no: CEO Lloyd Blankfein left a voicemail on every Goldman worker’s phone saying,
“Goldman Sachs has never condoned and would never condone inappropriate activity by any of our people. On the contrary, we would be the first to condemn it and take immediate and appropriate action.”
We’ll see. According to the SEC complaint, Goldman Sachs was approached by hedge fund operator John Paulson (no relation to ex-Treasury secretary and ex-Goldman CEO Henry Paulson), who wanted to bet against sub-prime mortgages—that is, he wanted to bet that their value would fall as their riskiness became clear and as borrowers defaulted.
Working with G-S vice president Fabrice Tourre (“Fabulous Fab,” as he called himself), Paulson hand-picked a billion dollar portfolio of mortgage-backed securities that he considered the absolute riskiest and most likely to fail. G-S packaged the securities and peddled them to European banks that believed that the mortgages were solid. Nobody told the buyers that the portfolio was designed with Goldman’s connivance to be the worst in all the world. Within nine months the mortgages tanked, Paulson made a billion dollar profit, the banks lost a billion dollars, and Goldman collected a $15 million fee for structuring the deal.
If the SEC complaint is factual—which remains to be proven—then Goldman Sachs deceived the buyers of the shaky mortgage package. The SEC calls it civil fraud; the Justice Department could still bring criminal charges in the case.
This will be an object lesson in business ethics: Will Goldman succeed in refuting the SEC’s charge? Or if the charge is true will Goldman defend Fabulous Fab’s behavior? If so, they’ll be saying that it’s OK to deceive their clients. They’ll answer “Yes” to Rick Sanchez’s question: “Is it OK to cheat as long as it’s not illegal?”
Let’s hope they answer “No.” Or better, “Hell, no.”
Tags: civil fraud, defrauding investors, Fabrice Tourre, Fabulous Fab, Goldman Sachs, hedge fund, Henry Paulson, John Paulson, Lloyd Blankfein, mortgage-backed securities, Rick Sanchez, SEC, Securities and Exchange Commission, sub-prime mortgages, voicemail
Ethics Bob 
April 21, 2010 at 5:59 am |
It appears that Goldman-Sacks violated an important principle set forth in Leviticus 19:14, to wit: “You shall not curse the deaf nor place a stumbling block before the blind…” The Talmudic Sages interpreted this metaphorically to apply to many situations, to protect those who could not see or understand a stituation. A good essay on this is “Placing a Stumbling Block Before the Blind Person: An In-Depth Analysis” by Hershey H. Friedman, PhD, Professor of Business, Brooklyn College, at http://www.jlaw.com/Articles/placingstumbling.html.
April 21, 2010 at 7:53 am |
Thanks, Ed. I loved the essay you link to. I think I can use it in my business ethics course.