High finance morality

Ronald J Colombo provides a simple explanation of what is going on with “the Securities and Exchange Commission’s securities-fraud civil suit against Goldman Sachs.” The essence is that a house of cards was built so one client could gamble it would fail and other clients could gamble it would not. The moral dilemma is about whether those who gambled the house of cards would not fail were properly informed about the reasons for its construction.

Goldman’s behavior might be permissible under U.S. securities law, it most certainly is impermissible under traditional notions of right and wrong. All the disclosure in the world does not absolve someone of the basic moral precept to do unto others as you would have others do unto you. It’s simply morally wrong to sell someone – especially one’s own clients – junk specifically designed to fail, regardless of how many warning labels are attached. A degree in moral philosophy is not needed to see that.

Today, however, a degree in modern moral philosophy might actually get in the way of seeing that. For we live in an age marked by an unprecedented lack of consensus over what “morally wrong” means. Indeed, one of the few vices recognized nowadays is that of being “judgmental,” and perhaps it was this vice that Goldman sought to avoid when it refused to characterize Paulson & Co.’s plans as morally wrongful. Instead, Goldman probably rationalized the proposed course of conduct as a legitimate business strategy within the confines of the law.

The principle is caveat emptor (wikipedia). What this has become is a political argument about just how far government should go to protect buyers.

The fact is that both sets of Goldman Sachs clients were playing games looking for unrealistic financial gain through market manipulation gambits. The issue is whether Goldman Sachs was right in playing neutral referee or whether the company should have been a coach for each side using its knowledge of the other side’s goals to help construct its advice.

Behind all of this were two factors. One is the massive amount of money looking for investment return and the other is the pool of financial instruments fostered by the government’s policies to encourage home ownership. The two made for a deadly mix.

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