Wall Street Read of the Week: “Goldman-Plated Excuses”

read6 4 Wall Street Read of the Week: Goldman Plated ExcusesHas it really been just one week since the S.E.C. sued Goldman Sachs? Fabrice “Fabulous Fab” Tourre is already an essential part of the life of New York, but we didn’t know his name last Thursday. That’s because, aside from the actual accusations in the government’s suit, the most spectacular thing about the scandal has been the breadth, depth, and immediacy of the response to it.

One recurring and interesting refrain from the Goldman apologists is that the investment bank wasn’t victimizing anyone. So-called synthetic CDOs are de facto gambits with winners and losers, the argument goes; one side wins, one side loses, and that’s just the way it is.

Interfluidity‘s Steve Waldman has a searingly good response to that.

One of the things that makes it so convincing is its moderation. “I’d argue even argue,” he says, “that, had Goldman done its job well, it would have done a public service by finding ways to get bearish views into a market that was structurally difficult to short.”

Mr. Waldman explains exactly why the firm needed to make sure that both sides of the deal that it had helped create understood what was going on. The S.E.C. has alleged that “Goldman wrongly permitted a client that was betting against the mortgage market”–the billionaire John Paulson–”to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.” As Mr. Waldman says, “That information would not only have been material, it would have been fatal to the deal, because the CDO’s investors did not view themselves as speculators.”

So far, like most of its peers, Goldman has been firmly unrepentant. “Goldman’s attempts to justify what occurred, rather than dispute the facts or apologize, could be the firm’s death warrant. The brilliant can be so blind,” he says, arguing that the firm should have just scapegoated Mr. Tourre and said he had gone rogue. But, for one thing, that’s not Goldman’s style. For another, the firm probably knew that the deal had been approved by “a dozen senior executives.”