Sunday, April 18, 2010

(No.88) Financial services: accountability for venal mediocrity?

Goldman Sachs was and still is a premier example of a Wall Street investment bank that put pursuit of profits ahead of everything. But it was far more than that; it was and is the corporate poster child for a defective financial services system.

For years most financial journalists, analysts and, yes, regulators managed not only to ignore that industry reality but to praise its defects -- or at the very least ignore them. For example: try 'googling' Goldman Sachs and review the sort of so-called expert opinion about the firm that was common before the 2007/2008 financial crisis. The prevailing tone: oh how impressive; wonderful, successful capitalism at work; medals all round.

The most charitable assessment one can offer now of all this sort of softball cheerleading among the 'experts' is that it constituted honours conferred on venal mediocrity by ignorance.

On January 1 this year I posted a column to in which I commented on the possibility that investment banks central to the Wall Street financial services meltdown were being seriously investigated by the U.S. Securities and Exchange Commission. In the run up to the crisis Goldman Sachs, among other firms, had (according to the New York Times) "created mortgage-related securities that were intended to make money for Goldman if the housing market collapsed. And, just as planned, the firm pocketed huge profits when they did turn sour".

I noted that American regulators were -- belatedly -- looking into the creation and peddling of these unregulated securities known as CDOs (synthetic collateralized debt obligations). As the Times put it, the regulators were "looking at whether securities laws or rules of fair dealing were violated by firms that created and sold these mortgage-linked debt instruments and then bet against the clients who purchased them [thus] setting up their clients to lose billions of dollars if the [sub-prime] housing market imploded ..." and of course it did.

I went on to observe that this activity and pattern was just one more manifestation of the obscene greed and lack of ethics of so many in financial services leadership. To me it is strikingly reminiscent of the approach taken by too many of those responsible for life insurance companies in Canada during the hustling to the public of, in particular, the first generation of a Term-to-100 product which at its core was a bet by the company against the client. [For my extensive commentary on this aspect of T-100 policies see column No.71 on]

Now, as of mid-April 2010, the SEC has filed civil fraud charges against Goldman Sachs. Why and why now?

I think there are several factors involved. Among these is the fact that the SEC, having completely dropped the ball in the multi-billion dollar Bernie Madoff ponzi scheme, wants to demonstrate its competence and newly rediscovered aggressiveness; in part it reflects a U.S. government desire to focus on and publicly demonstrate the need for the financial regulatory reform the Obama administration is proposing; and in part the Goldman action demonstrates to the public and to Wall Street that the big boys are not going to escape entirely at least some formal responsibility and legal accountability for the calamity they caused.

And what do the SEC charges against Goldman Sachs involve? They focus on what I referred to in my January 1 column: i.e., betting against clients through Goldman involvement with a hedge fund scheme selling CDOs to investors.

As for the Canadian life insurance industry's sometime love affair with the sale of lapse-supported Term-to-100 policies, the industry was betting against its clients and -- as I argued both privately and publicly after they appeared and ever since -- this was ethically dubious. The fact that it was legal did not justify that activity any more than a theoretical legality justifies the greed and incompetence of the financial services CEOs who came so close to creating a complete financial services meltdown -- and then sought to pay themselves huge bonuses while employees, shareholders and taxpayers suffered the negative financial consequences.

It is worth noting that not one of the most important U.S. financial services firm players who should be held to account individually for the crisis has yet been charged with anything.


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Alastair Rickard