Last week’s debate over financial reform both angered and confused many Americans. The Senate spent the final week of April debating a financial reform bill that failed to pass. It made for great TV and incited much debate.
The Senate’s 11-hour grilling of Goldman Sachs was frustrating to watch. It was filled with heated exchanges between lawmakers and past and present Goldman Sachs leaders. While some expressed a bit of compassion for Americans who lost money during the financial meltdown, most defended actions as falling within the norms of business. Senators accused executives of running a crooked casino. The 18-month Senate investigation found that Goldman Sachs bet against its own clients and profited as the housing market collapsed. It is important to note that Congress also played an important role in the economic collapse by repealing many safeguards put in place after the Great Depression.
The American economy is based on a free market system and there are many who defend Goldman Sachs. Warren Buffett is one of the most vocal supporters. Buffett is a very successful American investor, CEO of Berkshire Hathaway and generous philanthropist. At a press conference on May 2, Buffett said, “I don’t have a problem with the Abacus transaction at all, and I think I understand it better than most.” Another defender emerged earlier in the week in Fareerd Zakaria, a Washington Post Columnist in “Cool the Goldman rage.” He wrote, “the rage surrounding the Goldman Sachs case can cloud our perspective and distort public policy.” He continued, “Whatever the new rules, one thing will not change: We can’t be sure in advance which securities are ‘good’ and which are ‘bad.’ If you doubt this, pick any asset you think is overvalued — American stocks, Chinese real estate, Pakistani bonds — and bet against it. Six months from now, you’ll be proved a genius or a fool. Oh, and to make the bet you’ll have to find someone to take the other side, so you’ll need someone to handle the deal.”
It’s true that Wall Street investment has always involved chance, risk and the hope of a financial reward. Wall Street practices may seem unethical, but that is not the same as illegal.
The fact that Goldman Sachs representatives won’t say they are sorry and has ellicited contempt amongst Senators and most Americans. Few executives seemed to find any of their actions wrong, but betting homeowners couldn’t pay mortgages and then profiting when it tanked is clearly wrong. They showed no remorse and the outrage spreads.
Internal documents from Goldman Sachs were most damaging. Emails between employees used profanities to describe faulty deals. Senator Carl Levin, (D-MI) kept using profanities as he quoted the emails to prove his point. Goldman Sachs sold investors sub-prime mortgage packages, but then made its own bet that those investments would lose value without telling investors. CEO Lloyd Bankfein, said that there is no ethical obligation to tell investors when the firms short their investments. How could making money if their clients’ investments lose value not be unethical? He said, “In the context of marketing, that is not a conflict.”
Don’t the highly paid lawyers and consultants realize the proven way to handle a crisis? Step one is to admit wrong-doing. Step two is to sincerely apologize. Step three is to create an action plan to assure Americans that this will never happen again. Goldman Sachs and other Wall Street firms have failed to police themselves and now the government has stepped in to protect Americans.
Goldman Sachs executives weren’t the only ones using double-talk and failing to create an action plan. Senators engaged in a ridiculous battle filled with name-calling and ugliness. Democrats employed a strategy designed to make their Republican counterparts look as if they were against reform. Democrats called for three votes and three times they blamed Republicans who voted no. Republicans like Senator Kit Bond (R-MO) countered, “We, as Republicans, want to make sure we fix Wall Street without crippling Main Street.” Republicans won a few changes and Democrats got a deal to move financial reform to the front burner. The devil is in the details, however. New rules for banks and creating a whole new consumer agency will continue to be points of contention. Firms will lose profitability, but the average investor will benefit. Even the Goldman Sachs website seems to advocate financial reform. It says, “One lesson we have learned from the crisis is the need for more effective regulation. We are working with regulators on improved safeguards for the global financial system. One lesson we have learned from the crisis is the need for more effective regulation. We are working with regulators on improved safeguards for the global financial system.”
Senators have agreed to make changes to the financial system. Is it possible that a Wall Street Reform Bill will pass?