Battle on capitol hill

Battle on capitol hill

BATTLE ON CAPITOL HILL But the most riveting Battle of the Titians was undoubtedly the USA Senate Subcommittee (SSC) interrogation of Goldman Sachs (GS) on their business activities prior to the sub-prime mortgage crisis. No reality TV show could possibly have been more fascinating. The issue is the difference in objectives and responsibility for GS as a major market maker to the market, as a broker to their clients, and as an active principal to their shareholders (and themselves of course).

The SSC did not ask anyone at GS to explain in layman’s language what a market maker is and how GS operates, so there were a lot of misunderstandings in the question and answer process. The SSC, led by their imposing President Carl Levin, was relentless on business morals and ethics, the public’s ongoing anger at the financial entities role in the credit crisis, the perception of client trust and belief in products sold by GS, and the key point of conflict of interest in actively selling complex mortgage derivative products to clients when GS were hedging against these same products as principals on their own account. And those bonuses, so popular!

The GS team was clearly confused by some of the lines of interrogation and were badly prepared on detailed documents; these guys are not used to public interrogation, and had probably thought the questions would be on procedures, not on morals. The traders were uncomfortable and evasive, probably trained by legal beagles “when in doubt, deflect”. The CFO David Viniar tried to explain the GS position on “going short” and the firm’s reactive risk management decisions when the sub-prime market cascaded; not a happy bunny when questioned about internal emails saying deals/products were “shitty”. The GS star in the shape of Lloyd Blankfein, CEO of GS, was also surprisingly uncomfortable under the SSC fire and the broadsides of the CSS on business morals and client trust left him floundering. GS broadly speaking didn’t get it and needs to boot up quick on ethics!

BUT it should not be forgotten that the stability of the financial markets is absolutely essential. Regulatory reform to prevent a future financial crisis – yes. Assassination of GS and other financial institutions with all that this implies – no.



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