Goldman Sachs and the Great Escape

I am neither going to defend nor condemn Goldman Sachs’ actions during the past couple of years.  From what I can discern out of a hopeless mix of half-informed news stories, some very complex transactions (more on that in a moment) were used to hedge risk as Goldman Sachs foresaw the 2008 meltdown.  The heart of the matter seems to be whether the firm sold financial products against which it bet simultaneously.

All hedging works like that.  Intelligently taking opposing positions in a market reduces exposure.  Insurance, a product that all of us buy, works the same way.  I bet that my house will burn down while the insurance company bets it won’t.  Goldman Sachs’ alleged infraction was not informing its customers that it really believed that some of the things it was selling would tank.  Enough on that story, though.  The real issue is our own failure to become educated in financial matters.

A company should be able to sell anything it wants to anyone it wants (minors excepted for obvious reasons).  When two parties trade voluntarily, one has no reason to blame the other unless taken in by an outright lie.  If I get you to send me a check for a used car and then keep the car and hide it so you can’t get to it, I have committed fraud.  Fraud is the equivalent of theft–in this case I stole your money by force, but without a gun.  The moral argument here is clear.

But what if I sell you that car, deliver it, and then it breaks down three days later?  Clearly you did not get the value you expected.  Am I guilty?  Most people would say no, unless I knew it would break down.  What if I just suspected it would break down?  What if I honestly believed it was sound and it broke down anyway?  The long and short of it is that there is a broad continuum along which there are degrees of candor and honesty.  No one provides a list of everything that is or could go wrong with whatever he is selling.  No one, that is, who expects to sell anything.  If you don’t believe me, take an honest look at yourself the next time you sell a car or house.  Chances are you will not lie about the age of the sump pump, but you will not volunteer that information unless asked.  You expect the buyer to take on reasonable risks connected with the purchase.

My first real car purchase was a lovely little Porsche 914.  Or so I thought.  I was in a hurry and did not get my mechanic to give it a once-over.  It was the most costly, frustrating, and maddening piece of transportation I ever bought.  Since then, I have a policy of paying a reputable mechanic to inspect any vehicle I purchase.  I have never had trouble of that kind again.  Go figure.

Most of us chuck our money into whatever instruments our employer provides.  We don’t know what we are invested in, we don’t care what we are invested in, and we have no clue what the alternatives are.  But we do know one thing.  If we lose a bunch of money, it’s someone else’s fault.  The freedom to trade implies the responsibility to become informed.  If you want to avoid sullying yourself with matters of (ugh) money, then live with the consequences.  If you want to live like an adult in the 21st century, become more informed.  You will win sometimes and lose sometimes–nothing in this life is assured.  In the long run, though, you will start to win more as you take responsibility for your own financial life.

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Terry has a new product to sell.  It makes you slim, beautiful, and rich.  The best part is, you don’t have to do anything!  Please send your check to him right away before this deal ends.

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About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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2 Responses to Goldman Sachs and the Great Escape

  1. Doctor Bill says:

    I have yet to see any information that indicates Goldman-Sachs actually engaged in fraud. It appears that they simply neglected to go above and beyond the requirements of the law in revealing information to potential investors. Considering the current near-incestuous relationship between Goldman-Sachs, the Treasury Department, and the Federal Reserve, a discovery that they might have been a little more insightful into the long term prospects of making home loans to crack-heads and deadbeats seems to be something more of a wrist slap than Capone’s conviction for tax evasion.

    So G-S hedged their bets on what was starting to look like a huge housing bubble by shorting some of those same funds. Guess what, I more or less did the same thing; albeit not by choice. When I had to sell my house due to the collapse of the company that employed me I was able to sell it almost at the peak of the housing bubble. Once my family moved to a new state we decided to rent for a while since I was pretty sure housing prices would drop. I was right. I basically “shorted” the housing market. I expect my congressional subpoena to show up any day now.

    Doctor Bill

    Like

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