The Investor

Why Do They Do It?

A few thoughts on finance, Goldman Sachs, and porn stars.

By 5.10.10

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Now for a few thoughts on finance, ethics, and the economy that have some relevance to what is going on in the nation today.

* Most of the men and women who work in finance and who handle other people's money are devoted, capable, law abiding persons. This cannot be forgotten in the midst of a general outcry about some persons and some entities that put profit far ahead of pride. A staggering sum of money passes through these peoples' hands daily without untoward incident. Credit where it's due.

* However, that being said, there are certain persons and certain entities for whom profit is pride and for whom all the big questions in life are about "how many" and not about "how," or more properly put, all questions about "how" and "why" are answered by answers about "how many."

For an instructive example, I often hear questions about how people on Wall Street and in finance could possibly have made bets against their clients and lied to and deceived them. I am not saying that happened in the Goldman Sachs case, although the SEC alleges that it did. But clearly there have been many such cases in the past. The whole story of Drexel Burnham Lambert was about lies to the clients. So was a large part of the story of Enron.

How can men and women behave that way? Well, let me give you an example. I have long wondered how men and women could appear in porn movies. To me, they seem repellent and degrading on a special, humiliating scale. What could make human beings do such things and then have them on the Internet for the world to see in perpetuity?

Was it some childhood scar? Some deep deprivation of love in infancy?

A few days ago, I ran into a beautiful, revealingly dressed woman in the elevator of a building in Los Angeles where I have an office. I asked her where she was from and she mentioned a small city in Texas. I asked her what had brought her to Los Angeles.

"Well," she said, "I came here to be in the adult film industry."

"Really?" I asked her. "I have always been curious about what makes people go into that field. Do you have any ideas about what deep motives might have made you go into it?"

"Yes," she said. "It pays really well."

"Okay. How much can it possibly pay?" I asked.

"From five hundred to fifteen hundred a scene," she answered.

"With respect," I said, "that does not seem like a lot."

"It is to someone who was earning an hourly wage as a waitress," she said. "Where else was I going to earn that much money in a day?"

There you have it. For some people, if there is enough money, that answers all questions about morality and ethics and pride.

Obviously, the comparison with Goldman Sachs is imperfect. They sometimes get millions of dollars per scene. But the general principle, that money is more important than ethics or pride, is not at all different. In a world where the only thing that most people notice about you is how rich you are or what you own, and where for many people that is all they notice about themselves, money talks. We can blame Mr. Lloyd Blankfein or Mr. Fabulous Fab Tourre all we want, but they live in a world that many of us live in. Some succumb and some do not.

* I am a huge fan of the uniquely great documentary about World War II, Victory at Sea. I originally watched it with my Pop when it came out in about 1954, and I have watched it many times since. Some of the most graphically exciting scenes are of Japanese kamikaze suicide bombers diving at U.S. ships off Okinawa and the Philippines. The Navy sends up a stunning barrage of flak, but many of the planes get through anyway.

I have been thinking of that as I watch the fantastic barrage of PR flak that Goldman Sachs has been shooting into the air. Some of it is almost unbelievably mendacious. Among my favorites:

• The claim that the two main victims of the alleged fraud, IKB, a large German bank that bought about $150 million of Abacus, the allegedly designed-to-fail housing based bond, and ABN, the bank that insured the bond, were sophisticated investors to whom no special duty of care or honesty was owed. In other words, says Goldman, "caveat emptor."

The problem here is that this is not the law. Caveat emptor has not been the law in securities sales for at least 77 years. The law is full disclosure of any material fact by anyone underwriting a security. Even if the lowest possible standard applies, that standard is of suitability for a client. Obviously, failure to disclose that we, Goldman, are selling you a security that has been carefully crafted to fail when you have specifically told us you want a security that will not fail, is not full disclosure and the security is drastically unsuitable.

Obviously, not telling a buyer that John Paulson, a notorious bear on housing, is on the short side of this bond and helped design it to fail, and instead telling the buyer that Paulson is on the long side of the bond, is not full disclosure. Nor is such a bond suitable. The same goes for disclosures and lack of them to the bond insurer.

In fact, even in the ancient days of "caveat emptor," "buyer beware" applied only in cases where there was silence by the seller about an attribute of what was being sold. It did not apply to fraudulent affirmative disclosures. These have always been barred, whether the buyer is a big bank or a little old man. Sometimes, the punishment was death.

• Goldman says it is not to be blamed because -- after all -- it lost money on the Abacus deal, too. Yes, indeed it did, because the market for that kind of bond was collapsing so fast that Goldman could not sell it all and some stuck to its hands. Goldman's loss proves nothing except that it was selling something so bad even its mighty marketing arm could not move before it turned lethal.

• The "yes, it was a conflict of interest but we at Goldman specialize in managing conflicts of interest..." defense.

Really? Maybe Goldman would not mind sharing with the rest of us how you manage a conflict of interest in which you sell something guaranteed to fail while promising it is a solid investment. Maybe they would be kind enough to tell us how, as a matter of fact, you turn a conflict of interest into not a conflict of interest. "Managing" a conflict of interest is like being "...a little bit pregnant." You either have a conflict of interest or you don't. The only way I can see to make that work is if you agree to make whichever party is unhappy with the results happy. I don't see Goldman offering to do that.

• The "All of this is political and meant to help President Obama get his financial regulation law enacted." That's possible. Life is largely political. But if that's true, then the SEC has come up with some amazingly specific data about specific wrongdoing at a specific time and place. And even if the complaint did issue so as to help passage of the reform -- and as a former regulator, I can say I never saw that happen -- the facts have to be rebutted for Goldman to triumph, and that will take some considerable doing.

• Finally, the "...it's all Fannie and Freddie's fault...." This one is really rich. Certainly Fannie and Freddie have behaved with staggering incompetence. Their loan loss provisions were dizzyingly inadequate. Their pay scales for top executives of a basically fraudulent GSE were outrageous.

But again, two wrongs do not make a right. The fraud at Fannie and Freddie did not cause in any direct way the fraud and wrongdoing on Wall Street although some inspiration was there. But because Fannie and Freddie were being run by liars and fools and knaves does not excuse other people acting like thieves. And certainly, the problems at Fannie and Freddie, while serious, did not lead to the collapse of Lehman, the credit crunch, and the recession. The government bailed out Fannie and Freddie. There was major loss to taxpayers but that did not cause the recession. Wall Street did.

There is a lot more to be said, but at bottom, it is all a sad state of affairs about our beloved America. And here is the saddest part: we worship money in this country, and no one even knows the names of the people who fight for us on the streets of Kandahar or Kansas City. Sad.

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About the Author

Ben Stein is a writer, actor, economist, and lawyer living in Beverly Hills and Malibu. He writes "Ben Stein's Diary" for every issue of The American Spectator.