Goldman, Stiglitz and the Future of Investing

As someone who has participated in, observed and reported on the Wall Street landscape since 1978, you would think that little that happens on Wall Street would surprise me anymore. But I must say that over the past three years, since mid-2007, the velocity of dramatic events surprises even this observer-participant.

Undoubtedly, the fact that I was working my way through NYU during my years on Wall Street informs my thinking and opinions, as has participation in many discussions and meetings as a founder of The Committee for the Fiduciary Standard, a group that advocates for the fiduciary standard for providers of advice to investors. Unlike many who report on what is happening with Wall Street, the economy and investing, I was a broker, then bond trader/underwriter and later, an investment advisor, so that gives me an unusual perspective.

From this perch, a few observations:

? The economic crisis is far from over--and if there are not more measures to help the private sector create--and retain jobs, it seems that we as a nation will not be able to sustain growth for a much longer time than most people believe or at least seem willing to say. Globally, problems in Europe don't appear likely to dissipate anytime soon.

? The severity of the crisis in America and globally is man-made, or at least made much worse by the actions of a few men (mostly) rather than a markets correcting themselves. Sorry, University of Chicago free-markets economists, I don't think markets can correct themselves when they have been so severely disrupted by greed and leverage and the lack of regulatory oversight that basically manipulated market forces. There needs to be intelligent regulation and oversight, transparency and actual truth-telling by participants for markets to work effectively.

? When a banks can leverage deposits in such a way as to provide much-magnified capital in order to fund the kinds of operations that, before the end of Glass-Steagall, would have been restricted to non-bank broker/dealers and hedge funds, a mere modicum of common sense would indicate that the leverage applied to these operations would distort results--both upside and downside--as we have seen this past several years, to the detriment of most investors--and all taxpayers. Hello moral hazard--something else that doesn't appear to be going away, unfortunately.

Goldman Sachs still in the eye of a storm

Goldman Sachs--charged with civil fraud by the SEC in the ABACUS 2007-AC1 CDO deal, was subpoenaed on June 7 for its refusal to cooperate with the Financial Crisis Inquiry Committee's (FCIC's) requests for information and testimony by executives, see "FCIC Subpoenas Goldman Sachs." Goldman face another helping of SEC scrutiny, as the Financial Times reports in "SEC probes second Goldman security" that "the SEC has stepped up its inquiries into a complex mortgage-backed deal that was not part of the civil fraud charges filed against the bank in April." Even if one makes the argument that Goldman Sachs was dealing with institutions and that all parties may have been betting rather than investing, not disclosing the selection of underlying mortgage-backed securities by a party to the deal (material?--you tell me) seems to cross the line even if dealing under a suitability-sales-fair dealing standard of conduct.

The fact that Goldman Sachs seems unwilling to respond to the FCIC's requests is baffling. While nobody would think that Goldman Sachs is incompetent to comply, it would seem that the only other explanation is that they are so arrogant that they do not feel that they need to comply. Neither of these explanations helps Goldman's reputation and only helps to strengthen investors' distrust of Wall Street firms.

The Financial Times also reported that Goldman Sachs has been "sued for $1bn by Basis Yield Alpha Fund (Master), an Australian hedge fund, claiming that the bank made 'misleading statements' in connection with Timberwolf, a complicated mortgage security the bank underwrote in 2007." See "Goldman sued for $1bn by hedge fund."

Nobel Laureate Stiglitz supports the fiduciary standard

Meanwhile, Nobel Laureate Joseph E. Stiglitz has weighed in on financial reforms, in "Reach equals grasp on banking bill," his opinion piece on the Politico Web site. He adds his endorsement for extending the fiduciary standard to brokers. Stiglitz says, about reconciling the House's and Senate's Wall Street reforms bills: "The argument that we should delay some desirable reforms for a few years--for more "study" or until the financial sector has been better recapitalized--is unconscionable; continued regulatory forbearance puts the economy at risk."

Stiglitz, who was awarded the 2001 Nobel Memorial Prize in Economics, adds: "The House version is absolutely correct to impose a fiduciary responsibility on brokers that give investment advice. We need to restore trust to our financial system; and the system's resistance to this, and other reforms intended to bring a modicum of investor protection, demonstrates why we should not give that trust."

What do you think?

Kate McBride (kmcbride@wealthmanagerweb.com) is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.

Read more Wealth Manager: Viewpoint blog posts:

Fiduciary Standard Absent from Senate Reform Bill May 21, 2010 - By But broker/dealers and insurers may see better informed retail investors vote with their heads and feet.... A 12-Step Program for Wall Street? May 13, 2010 - Some Wall Street firms are being investigated for conduct that does not comport with good business practices but rather the basest forms of self dealing, or allegedly, worse. Maybe Glass-Steagall was a good idea after all.... Class Action Lawsuits on 401(k)s April 12, 2010 Investors in 401(k) plans who are frustrated by proprietary funds, opaque high fees, revenue sharing and sub-par performance are starting to get overtures from lawyers who are gathering investors for class action suits against 401(k) providers.... Six Choice Pieces of Fiduciary Misinformation March 18, 2010 There is a great deal of chatter surrounding the fiduciary movement that is just plain incorrect--as in, not fact--whether from ignorance or deliberate obfuscation. Why Shouldn't Investors' Best Interests Come First? February 25, 2010 Are Senators strong enough--and do they have enough integrity--to stand up on behalf of retail investors and insist on extending the fiduciary standard to cover those who provide advice to retail investors?... Greater Good: The Unintended Consequences of Repaying TARP January 29, 2010 Did the requirement to repay TARP funds in order to pay bonuses for 2009 prompt some banks to repay the bailout funds too early? ... Smart Money January 19, 2010 Goldman Sachs Chairman and CEO Lloyd C. Blankfein testified that at Goldman Sachs, "...we do support the extension of a fiduciary standard to broker/dealer registered representatives who provide advice to retail investors." ... Ever Hopeful December 29, 2009 As we emerge from a challenging economic crisis, there is reason to hope that changes and opportunities we will see in this new year--some as a direct result of the economic crisis--will be positive.... Schapiro's Call for Fiduciary Standard Reflects SEC's Original Mandate December 07, 2009 "I believe that all securities professionals should be subject to the same fiduciary duty," says SEC Chair Mary L. Schapiro.... Mr. Dodd's Message from Washington November 16, 2009 Now that we have heard from both the House and Senate committees on finance and banking about investor protection, let's not misinterpret what they are saying.

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