“Something Doesn’t Have to Be Illegal to Be Wrong”

Today I saw three major financial commentators make the point or something thereabouts that Wall Street’s doesn’t have to break the law to be unethical, immoral, and, thus, worth condemning.

This is a critical point, especially since these guys (the Street, that is) are so well lawyered and have basically written the rules for years.

Allan Sloan writes in Fortune, cracks on Goldman (an Audit funder):

But I don’t much care about the legality of what Goldman allegedly did, because something doesn’t have to be illegal to be wrong. And almost everything about the Abacus 2007-AC1 “synthetic collateralized debt obligation” deal was wrong….

Abacus, as we’ll soon see, wasn’t an investment vehicle — it was a gambling vehicle. By definition, with a synthetic CDO someone’s gain is someone else’s loss. Think of it as a big-bucks poker game in which Goldman lined up three high rollers, provided them with a private room, helped negotiate the rules, and took a fat fee for bringing everyone together.

When you host one of these games, you not only have to make sure that it isn’t rigged, you can’t afford to have it looked rigged, in case the losers (or the people who cover their tab) go to the cops. In addition, if you’re smart — what Goldman calls “long-term greedy” — you make sure the game doesn’t help undermine the society that makes your business possible.

Goldman, based on what I think I know about this case, violated both these principles.


Meanwhile, Andrew Ross Sorkin gets the gambling thing, too, today, in a good column:

But if there is a larger question, it is this: Why was Goldman, or any regulated bank, allowed to create and sell a product like the synthetic collateralized debt obligation at the center of this case? What purpose does a synthetic C.D.O., which contains no actual mortgage bonds, serve for the capital markets, and for society?…

In this case they were a bet on the value of a bundle of mortgages that the investors didn’t even own. (That’s why it is called a derivative.)

One side bets the value will rise, and the other side bets it will fall. It is no different than betting on the New York Yankees vs. the Oakland Athletics, except that if a sports bet goes bad, American taxpayers don’t pay the bookie.

Right on.

Also, in the Times, Roger Lowenstein:

Wall Street’s purpose, you will recall, is to raise money for industry: to finance steel mills and technology companies and, yes, even mortgages. But the collateralized debt obligations involved in the Goldman trades, like billions of dollars of similar trades sponsored by most every Wall Street firm, raised nothing for nobody. In essence, they were simply a side bet — like those in a casino — that allowed speculators to increase society’s mortgage wager without financing a single house.

And he has some good prescriptions:

First, it should insist that all derivatives trade on exchanges and in standard contracts — not in customized, build-to-suit arrangements like the ones Goldman created…

Second, Congress should take up the question of whether parties with no stake in the underlying instrument should be allowed to buy or sell credit default swaps.

There’s something of a “where-has-this-been?” feeling with this stuff. But I’ll take it. It’s surely progress to see this from our top commentators.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.