Merryn's Blog

The Goldman case upside: no more trust for big banks

Our trust in big banks turned out to be a big mistake. The good thing about the Goldman case means we won't make that mistake again.

An email comes from a banker friend. It is titled "where we went wrong."

He remembers, he says, sitting with me over a few drinks in 2007 talking about how we might be able to short the residential property market. We didn't come up with an answer (I'd already sold my house and he was trying to sell his).

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Now he is irritated. Clearly, he says, finding a good way to short was always going to be challenging. But the Goldman case shows that it could have been done "so long as you were a reasonably large hedge fund and had an investment bank willing to commit grand scale fraud to help put the trade in place."

Goldman Sachs has had its PR department working overtime for the last few days as it vigorously denies all the charges against it (namely that it allowed a hedge fund to help create a product it wanted to short and then sold it to other, less savvy investors). But whether the charges turn out to be upheld or not, the reaction from my banker friend (no stranger to the seedier side of the industry himself) says all you need to know about the reputation of the once-impossible-to-criticise Goldman: it isn't what it used to be.

Advertisement
Advertisement - Article continues below

Employees of the bank will think this is a bad thing. I'm not so sure. The banks are, of course, not entirely to blame for the financial crisis. Anyone looking for scapegoats has to have a go at central bankers and the ludicrous inflation targets that allowed them to keep interest rates so low for so long; at institutional shareholders and their odd passivity in the face of the risks taken by the managers of their holdings; at the governments that encouraged even those who couldn't afford to buy homes to buy homes; at the nitwits who couldn't afford to buy homes who bought homes with subprime mortgages; and at the regulators who throughout the bubble years persistently regulated the wrong things.

But look at the list of scapegoats and you'll see they have one thing in common: they could only have operated in the way that they did as long as they thought the big banks would behave with some degree of morality. Every one of them, from the would-be homeowner who assumed that his bank would never lend him more than he could afford to repay, to the regulators who let the banks tell them how to make the rules, and the shareholders who just accepted the idea that "you have to pay for talent," they all somehow trusted the bankers to get it right.

That trust has turned out to be a big mistake, something that should be brought firmly home to anyone still in doubt by the Goldman charges. And the good bit? Now that the reputation of the banks has been so comprehensively shot to bits, it isn't a mistake anyone is likely to make again.

Advertisement

Recommended

Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/516944/why-wall-street-has-got-it-wrong-again
Economy

Why Wall Street has got the US economy wrong again

The hiring slowdown does not signal recession for the US economy. Growth is just moving down a gear, says Brian Pellegrini.
25 Oct 2019
Visit/504252/brace-yourself-the-global-economy-might-be-healthier-than-it-looks
Economy

Brace yourself – the global economy might be healthier than it looks

Investors have been worried about a global recession since the start of the year. But the latest indicators suggest things might not be so bad. John S…
2 Apr 2019
Visit/502393/the-us-economic-downturn-its-only-a-matter-of-time
Economy

The US economic downturn: it’s only a matter of time

With the US economy facing headwinds from trade wars to slowing global growth, talk of a recession is picking up.
22 Feb 2019

Most Popular

Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/520575/20-predictions-for-the-2020s
Investments

Where will markets be in 2030? Here are 20 forecasts for the 2020s

A lot has changed in the last ten years – stockmarkets soared, technology transformed our lives and politics has changed beyond measure. Here, Dominic…
14 Jan 2020
Visit/520338/how-much-the-state-pension-will-rise-by-this-year
Personal finance

How much the state pension will rise by this year

While Boris Johnson promised to hold a full budget within 100 days of his election victory, many of the details of next year’s state pension increases…
10 Jan 2020
Visit/520553/money-minute-wednesday-15-january
Economy

Money Minute Wednesday 15 January: UK inflation and house prices

In today’s Money Minute, we look ahead to the latest UK inflation and house price figures, plus we have Germany’s GDP data for 2019.
15 Jan 2020