Blue skies, nothin’ but blue skies, from now on ……..
If the SEC believed their charges against Goldman Sucks (GS) were solid, verifiable, that they would “stick”, that they would end up in a punishing civil verdict against the investment banking firm, they would have levied a fine against GS to begin with. These charges have a very good chance of being overturned in favor of GS.
For every security, IPO, or market transaction, there is a buy side and a sell side. Hedging one’s bets is one of the most common strategies on Wall Street. The conflict is that when people lose money, all of a sudden they get morality. There has never been much of that on Wall Street, and certainly when new products are introduced, any existing morality falls by the wayside in an effort to sell the product. Read Steven Pearlstein’s article and then tell me that something other than the desire to make buckets of money was the real motivator in the Wall Street debacle. In fact, the only issue open for discussion should be if GS didn’t pull off this sub-prime mortgage caper, another firm would have. It is like a house of prostitution: any requested service, regardless of its morality or safety, will be delivered for the right price. Everything is for sale if the money is there.
GS does not believe they were at fault for not scrutinizing the individual loans in these subprime mortgage packages. They may have a point. Do you think that every new issue represents a sound, stand-up entity? No way. The IPO is just a method for that company to raise capital and for the underwriter to collect a huge fee. The real value of the new company and its publicly traded shares is just another way to generate cash across the board. It is not a statement on the solvency, social worth or morality of that company. The market will determine the real value of the new company once the shares start to trade.
In fact, if Wall Street finds itself short of sellable products, they will create new vehicles to maintain their steady stream of fees and income. Thus, derivatives of every size, shape and sort. The shortcoming that is just as much in play here as the risky underlying securities is the desire for everyone to hop on the bandwagon. As long as they made money, they never questioned the underlying value of the “security”, underwriters, issuing company and individual investors alike. However, the entire sub-prime market collapsed, people lost everything and now “morality” becomes the issue. Sorry: too little, too late.
GS characterizes their role in all of this as that of a middleman, i.e. structuring investment opportunities but not condoning the investment itself. In fact, how many prospectuses have you read that clearly state that the underwriter is neither condoning nor condemning the sale of the soon-to-be issued securities? That is why we have a “blue sky” period, right before the shares are released for sale. This is a quiet period meant to let nature take its course until the market itself can determine the true value of the shares.
Whether GS is just the middleman or the pusher of evil pills will become clearer. I do understand the nature of the dilemma: is the investment bank really just a conduit for creating new capital or is it intentionally misleading the public by marketing valueless investments in their goal attainment of more revenues? I think we will not get a definitive answer. Thus, the SEC will go down along with its charges against GS, who will experience a renaissance revival in structuring even more dubious investments.
I do not know what the answer is. Will more regulation help? I doubt it, because new financial instruments will be designed to hedge those exact regulations. Can morality be legislated? I cannot put my finger on exactly the malfeasance of GS, but I know it is there. That is the catch. The SEC knows it and GS knows it.
One answer might be that the blue sky period should be turned into a rip-roaring, rollicking “red sky at morning, sailor’s warning” period. Instead of forcing a deliberate time for quiet contemplation of the impending offering, perhaps we should designate this pre-offering period as a time for true disclosure. Investment bankers and brokers should be encouraged to address every aspect of this new issue. Every rumor and innuendo, as well as the facts and the figures, should be made public. Loudly and clearly. That, my friends, would be true due diligence. It just does not make sense that a quiet period prior to selling new shares is beneficial to all those involved, especially the buying public. This is the sticking point: the blue sky period is there to benefit the seller of the shares, but certainly not to inform the prospective buyers of possible risks. Sometimes, the opposite result is actually realized in the place of the desired result.
The saving grace of these charges will be if President Obama can use the ugly facts, figures and deals to influence those Congressmen to vote for financial reform. It is a wonderful trick of fate to have the Congressional hearings of GS paired perfectly in time with the push for financial reform. Of course, the next question will be: what shall we reform? If we cannot articulate what the fault of GS was, how are we ever going to correct it?
As with the blue sky example above, by supporting one side of an issue, the opposite desired result sometimes occurs. By slamming fiscal reform across the board, the GOP might be shooting themselves in their feet. Simon Johnson’s article lays out that possibility.
Something stinks in Denmark —- and on Wall Street, Portugal, Spain and Greece. Unless we get to the bottom of what already happened, we will not be able to issue corrective measures. But this time, the SEC will lose, GS will “win” and all the rest of us Americans might reap the benefits of this debacle, in the form of new legislation. Any takers for investments that securitize risks and rewards of new legislation? Even if we do get new laws , how about offering derivatives that hedge our bets against the chance of effective policy changes?
Blue skies, nothin’ but blue skies, from now on.