The Goldman case upside: no more trust for big banks

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).

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.

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.