The Moral Abyss on Wall Street

The Securities and Exchange Commission has recently filed charges against one of the most highly regarded firms on Wall Street, Goldman Sachs. The lawsuit claims Goldman defrauded investors by misstating and omitting information about a complex financial product tied to subprime mortgages.

The SEC alleges that Goldman Sachs created the synthetic collateralized debt obligation (CDO) called ABACUS after it was approached by a leading hedge fund, Paulson & Company. John Paulson, the funds manager, asked Goldman Sachs to create a financial product that would allow his firm to essentially bet against it. Paulson’s firm was actively involved in structuring the transaction and paid Goldman Sachs $15 million to put it together.

According to the SEC, Goldman Sachs represented that the residential mortgage backed securities were selected for ABACUS by an independent firm, ACA Management. The debt inside ABACUS soon became non-performing and investors in allegedly lost more than $1 billion. Paulson & Company made billions betting against ABACUS and other similar financial products.

Goldman Sachs has denied the charges and indicated that it will defend itself. The firm claims that it was not required to disclose who provided input into the mortgage-selection process for the transaction or what their intentions were.

When I was a senior at Stanford University, I interviewed for an analyst position at Goldman Sachs. This was in the late 1980s when investment banking was one of the more attractive fields for students graduating in economics from leading universities. I remember studying Goldman Sachs and preparing for my interviews in Palo Alto and in New York. I also remember thinking that Goldman Sachs was clearly the premier firm on Wall Street. Ultimately, I was not hired by Goldman Sachs and I pursued other opportunities.

I am not particularly interested in the nuances of the law and whether Goldman Sachs committed fraud. Based on what I’ve read, Goldman Sachs may be able to defend itself against these accusations. What I find disturbing is Goldman’s failure to adhere to basic standards of fairness, honesty, and integrity. I am left wondering if Wall Street has reached a tipping point and fallen hopelessly into a moral abyss.