Did You Hear the Joke About Goldman Sachs?

A revealing joke has been making its way around the internet, accreting new punch lines as it goes. Here's what I've collected so far.

Q: What's the difference between a bookie, a loan shark, a pimp, and Goldman Sachs?

A: Raping a customer you lent money to then bet against is legal.

or perhaps

A: Congress doesn't lend money to bookies, loan sharks, and pimps.

or maybe

A: Obama didn't take a million dollars in campaign contributions from bookies, loan sharks, or pimps.

or even

A: Bookies, loan sharks, and pimps don't send senior executives to Washington to work as high level government officials.

The rapidity with which this formerly esteemed firm has fallen from being sought after by politicians for money, people, and advice is a testament to the fickleness of populist politics. Underneath lays a tale not of a lawbreaker run amok but of an out of control corporate culture colliding with a corrupt and futile regulatory regime. The difference between these two interpretations matters as it informs the remedy.

Goldman Sachs has been the undisputed king of the investment banking business for as long as I can remember. Customers hired them because they delivered. Sure, Goldman has sharp elbows. Of course they were always looking out for themselves. Invariably they rigged the game for their own benefit. Without doubt their fees were monstrous. But customers lined up to pay those fees because they believed they were getting their money's worth. And they were confident that Goldman was so careful that no parties in a transaction would run afoul of the byzantine securities regulations designed by the lawyers and politicians who concoct the opaque and capricious rules ostensibly to protect the unwary but in fact to fill their coffers with fees and campaign cash.

When times were flush, no one looked too closely at the unavoidable conflicts of interest that define the investment banking business. (As the old saying goes, where there is no conflict there is no interest.) Rarely did anyone bother to read the pages of frightening disclosures that accompany deal documents. Do you read the nine page package insert the FDA makes drug companies stuff into your over-the-counter antihistamine?

Investment banks match up gamblers seeking to buy risk with businesses seeking to sell risk. This is essential to the proper functioning of global capitalism. Outlaw it here and it will go there. Try as you might to tame the beast, every business cycle proves that there is only one rule investors can always rely on - caveat emptor.

If you go to the high stakes poker table at the Goldman Casino and you can't spot the rube, you're it.

If you're an investment professional and you don't do your own due diligence, the world is a better place when you go bust.

If you're a public fiduciary what the hell are you doing in a gambling hall?

Yes, it's a shame that Goldman Sachs and their brethren built derivatives casinos atop a congressionally mandated mortgage dump called Fannie Mae. Everyone knew the dump was getting dangerous and that methane gasses from rotting mortgages were ready to explode. The smart gamblers figured they could get in one more hand before the whole thing blew. Politicians were happy to roll the dice right alongside them.

It's hard to escape the conclusion that greedy bankers and unlimited government guarantees of garbage dumps like Fannie Mae and Freddie Mac are a toxic combination. Now, which do you think is easier to put an end to - greed or government handouts?

This brings us to the remedy. First, the SEC lawsuit against Goldman is going to be a bust. This after-the-fact piece of concocted litigation may feel good but it will never make it across the finish line. We're not talking about a Bernie Madoff scheme, or even an Enron or WorldCom accounting scam. If you think Goldman's lawyers didn't carefully vet their offering documents against all applicable rules and regulations, you don't understand why they get paid so handsomely. Goldman will either win this suit on the merits or cop a plea and pay a wrist-slap fine as a face-saving favor to the Feds.

So Congress is in a lather working on a new set of regulations that will prevent problems like this from ever happening again. Really? Ask yourself these questions.

Did the government sanctioned ratings agencies prevent the meltdown?

Did the voluminous disclosure laws already on the books prevent the meltdown?

Did vigilant SEC inspectors prevent the meltdown?

Did a well financed FDIC prevent the meltdown?

Did Sarbanes Oxley laws prevent the meltdown?

There are no rules that Congress can put in place that cannot and will not be gamed. There is no such thing as taming the business cycle. Greed is no more likely to be eliminated than poverty. The only thing Congress has the power to accomplish is to prevent people from gambling with the public purse by ensuring that when gamblers fail they do so with their own money. And that solution is not even on the table!

Without risk there is no progress. Without reward there is no risk. Unless gamblers are forced to bear the costs of their own mistakes, failures will be ever more spectacular. And when that happens there will always be another Congress reaching for campaign donations with one hand as they dish out public money to well-connected losers with the other.