Think Again:

Whatever happened to ethics at work?

May 05, 2010|By Zanku Armenian

You may be following the U.S. Senate hearings examining Goldman Sachs, one of the largest Wall Street institutions, and their involvement in the subprime mortgage market around the time the financial crisis started in 2007.

The U.S. Securities and Exchange Commission has filed a civil fraud lawsuit against the company, claiming they created a subprime mortgage investment scheme that was intended to fail. Even the U.S. Justice Department is looking into the matter.

Goldman Sachs allegedly sold shaky investments it put together with subprime mortgages mixed in, but disguised them to look solid with AAA ratings while behind the scenes “shorting” the investments, making them money on both sides of the deal as the investments failed.


Basic investing is, you put money into an investment hoping that it will increase in value. “Shorting” is where you bet the value of an investment will go down and you make money when it does.

The question is the legality and ethics of devising a financial product that is disguised as highly rated but at its core is risky, and having a financial stake in its failure all at the same time. Imagine Toyota sold you a car that Consumer Reports rated reliable, but secretly their engineers had intentionally designed it to fail, and they placed multibillion-dollar bets in Vegas on that failure.

The Goldman Sachs issue and the Wall Street culture that irresponsibly spread this risk throughout the financial system is an assault on America’s middle class. While mortgages make home ownership possible for millions of Americans, bankers like Goldman Sachs treated the mortgage market like they were running a financial casino, and regulators looked the other way. When the system was pushed to its financial limits, it collapsed.

Taxpayers bailed these bankers out because they had a gun to our heads while our retirement funds, hard-earned investments and house values plummeted. Just look at foreclosures and home values in Glendale and you see the impact.

Since Goldman Sachs is one of the biggest players in municipal finance, helping cities raise necessary capital, I wonder what effect this will have on our city’s finances as we likely will see a flurry of lawsuits against the company by angry investors.

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