Goldman: Consequences of the Senate inquisition
The 10-hour torture session of Goldman Sachs executives by US senators yesterday disclosed a very basic disagreement between the world's most powerful investment bank and the world's most powerful legislature.
Goldman Sachs tried to explain, time and again, that market making - in its view - operates outside of any ethical or moral universe: the role of Goldman's market makers is to provide a product to grown-up investors, not to endorse that product in any way.
In that sense Goldman views its market makers as amoral (though, of course, not immoral). They are not the equivalent of the shop staff at Marks & Spencer or Wal-Mart, who - in a sense - are guaranteeing the quality of what they are selling on behalf of their company.
So although Goldman's executives squirmed when the senatorial inquisitors pointed out that its market makers were selling investments - collateralised debt obligations - that Goldman executives had described in internal e-mails as various forms of excrement, their view is that the financial institutions which bought the excrement from Goldman knew what they were doing.
Many of their answers can be paraphrased as follows: "there's a price for excrement; our clients are quite capable of working out what the right price might be".
And, the Goldman bosses added, it's not relevant that Goldman - for its own book - moved from being a net buyer of this horrid stuff to placing bets that it would become even stinkier and less valuable.
Well again it believes its clients are grown up enough to know that Goldman has its own balance sheet, which it has to manage for the benefit of the firm and its owners, and a separate "client facilitation" activity called market making.
Goldman's evasive action in 2007 to prevent itself being poisoned by all that housing-market ordure, the cleansing of its own financial corpus, was what any sensible bank should have done, or so Goldman executives would say. And it wasn't the role of Goldman's market makers to tell their clients to do the same.
All of which was received with a mixture of contempt and incredulity by the senators.
Their view - and it would be the popular view too, I would hazard - is that a bank with Goldman's history and reputation should not be conducting itself as though it was a street trader selling fake Rolexes which it has pretty good reason to believe will stop ticking within a few days.
If Goldman was desperate to empty its own warehouses of those dodgy investments - which Goldman concedes that it was - it should not have been selling them in the first place.
Now to be clear about all this, the argument here is about business ethics, about morality.
What some may find remarkable is that the senators were unable - at least as far as I could tell - to demonstrate that Goldman broke the law. And I am not sure that anything emerged that reinforced the strength of the Securities and Exchange Commission's fraud action against the investment bank.
That appeared to be the verdict of markets, in that Goldman's share price rose yesterday.
But that does not mean there will be no consequences for Goldman, and for other banks.
To be clear, it is not realistic to ban market makers like Goldman from taking positions for their own account in securities and assorted tradeable investments: no one, I think, would say that banks which trade foreign currencies or government bonds for clients should be prohibited from going long or short of those bonds for their own account.
But it is wholly realistic to put limits - as President Obama wishes to do - on the scale of own-account trading by banks like Goldman.
And in products as murky and difficult-to-analyse as collateralised debt obligations, the presumption that the purchasers of those products are grown-ups able to make rational informed judgements turns out to be naive (to put it mildly).
Which suggests that regulators will have to be much more intrusive in vetting the design and purpose of new financial products, even those aimed at banks and professional fund managers.
Because, as we've learned at some cost, when banks and other investors purchase excrement from the likes of Goldman, its taxpayers - all of us - who pay to clean the mess up.