Character is doing the right thing when nobody’s looking. There are too many people who think that the only thing that’s right is to get by, and the only thing that’s wrong is to get caught.
~ J.C. Watts
By now, you’ve probably read about the fraud charges leveled against Goldman Sachs by the SEC south of the border. I was watching news coverage on CNBC on Friday. I would normally prefer to get the Canadian angle from BNN, but our recent budget cuts mean that I can’t get that channel anymore.
Sue Herera is one of my favourite CNBC journalists as she seems to be one of a select few on that channel who has maintained some level of professionalism. She tends to address issues authentically, refusing to join in when her co-anchors shout down their guests and colleagues. Soon after the Goldman story broke, she pointed out the elephant in the room, making the following observation:
“. . . especially reading these emails . . . it’s another indication to the retail investor: the game is rigged. The retail investor has been sitting on the sidelines waiting to get into this market and now they find out that Goldman Sachs was selling things that were put together by a guy who had opposite positions in the market.”
The emails to which Ms. Herera was referring are in the SEC complaint. Here’s a taste:
1. This email originated from Fabrice Tourre, a Goldman Vice President, and was sent to a friend on January 23, 2007. In it, Tourre refers to himself as “the fabulous Fab”. Here’s an excerpt:
” More and more leverage in the system, The whole building is about to collapse anytime now . . . Only potential survivor, the fabulous Fab . . . standing in the middle of all these complex, highly leveraged exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!”
2. This email was sent to Tourre from the head of the GS & Co. structured product correlation trading desk. (Note: The spelling errors and/or typos you see in these 2 emails are correct. These are direct transcripts.) This is a small part of it:
“the cdo biz is dead we don’t have a lot of time left.”
A short while after that segment, the network trotted out a series of experts to weigh in on the developing story. They were asked whether this latest Wall Street scandal would keep “the little guy” out of the market for much longer than expected. If you’re wondering who that little guy is, it’s you and me. That’s how the people who run the market and our money view us.
Is Goldman Sachs Cockroach #1?
In terms of trouble in trading or in life, a lot of people subscribe to the cockroach theory: There’s never just one. If Goldman was pulling this kind of slick shell game, you can be sure they had a few others going on as well. Further, they probably weren’t the only big financial institution running these types of bait and switch rackets.
Who could blame “the little guy” for not wanting to play these games anymore? Still, you will read and hear endless market gurus and investment advisors hit the airwaves over the coming days and weeks reminding you to stick to your plan and think long term. In some respects, these optimists are probably right. These little earthquakes do hit the markets from time to time and they usually seem to rebound eventually.
On the other hand, this type of scandal seems to be popping up with increasing regularity. Fool me once, shame on you. Fool me twice, shame on me. When I wrote 10 Reasons to Be Cautious Right Now back in early February, trust was number 10 on my list. In many ways, it deserves to be number one. All markets are built on trust. Without it, the system collapses. I hope we can restore some level of integrity to these markets before that happens.
My 2 Cents
This issue arose after I had already written tomorrow’s post on Capitalism: The Missing Links. In it, I focus quite a bit on integrity. I was going to edit the post to include something on Friday’s news, but I decided to leave it as is.
If you are at all interested in the integrity of the financial markets, I would highly recommend that you read the comments of Muriel (Mickie) Siebert. This interview was published on April 9th, well before the Goldman news hit. This lady has more common sense than all of the politicians and investment bankers in the U.S. put together. She’s forgotten ten times more than I’ll ever know.
To answer the title question as honestly as I can, I would have to say I don’t know. But it sure looks like at least some market players need to brush up on the principles of fiduciary responsibility and integrity.
What do you think? Is the market corrupt? Did Friday’s news about Goldman change your views?
I don’t really worry about whether the market is corrupt in the short term. Overall, it’s a weighing machine, as Benjamin Graham used to say, and not a popularity contest.
These messes have been around for as long as we’ve had markets. I love reading the really really old stuff from the turn of the previous century, and seeing that what Mark Twain says is true: “History doesn’t repeat itself, but it rhymes”.
Long term, stock market profits will equate to dividends and capital appreciation, and it will, long term, reflect the overall rising intrinsic value of businesses as an aggregate–after fees.
With fees as high as they are, for active management, I think there could potentially be only two types of long term losers, relative to the market’s performance.
The first type are going to be those who think they can beat the market by buying overpriced actively managed products. The second type will be those who try “timing” the market by thinking they can figure out when the best time to “get in” and “get out” will be.
I’m with Jack Bogle on this one. The best way to ensure your share of stock market profits is to have money in the markets all the time, diversify, and keep costs as low as possible, because picking active managers to do it for you (statistically, in comparison) is a loser’s game (in Charles Ellis’ words). What role would Goldman Sachs play in this game? Perhaps its stock would represent .00001% of your portfolio if you were nicely diversified. And you’d keep away from its active managers and suggestions if you invested in a fully low cost, diversified manner, and not like a gambler.
Whether one investment group tries to pull “fast ones” on investors shouldn’t matter for those buying the entire haystack through diversified indexes.
I have sympathies for the people who get hurt, but if research overwhelming suggests that we stand the best chances of living a long time by eating fruits and vegetables, we can feel badly for those eating at McDonalds and smoking, but it’s not as if the information wasn’t out there.
McDonalds = expensive active management, trying to pick individudal stocks and market timing.
Fruits and veggies = diversified indexing with stocks and bonds
The fact that George Burns lived nearly a century on cigars and fatty foods shouldn’t tempt us as much as it (metaphorically) seems to.
And if Goldman contributes to a “tip of the iceburg” deck of cards, things will fall. Sure. Young people can celebrate by buying cheaply into the stock market–perhaps for years to come. Retirees should have the bulk of their money in guaranteed certificates and triple A rated bonds so they won’t be too adversely affected by a widespread decline.
Invest like a Buddha.
Andrew
.-= Andrew Hallam´s last blog ..No joke—I think I just cracked a rib running! =-.
Thanks for your thoughtful commentary Andrew. My main worry is for those who are overweight stocks and don’t realize that the house of cards scenario is a possibility if trust in the markets is damaged. We need more transparency, especially with regard to dark pools of capital. I like your advice that young people can profit from a broad market decline, but that older people should have much less money allocated to the stock market to protect themselves.