Thursday's news that Goldman Sachs, Wall Street's biggest money machine, will pay $550 million in fines is comforting. Federal regulators apparently have decided that cheating is wrong. Even on Wall Street.
Goldman paid the fine to settle charges that it failed to disclose to buyers of a huge mortgage-related portfolio that it was designed by a hedge fund betting against the housing market.
Goldman, which was aggressively trading against the housing market for its private account, acknowledged that it made "a mistake" in its infamous "Abacus" deal.
Observers noted that the fines were a fraction of the $13.4 billion in 2009 profits at Goldman. Since 2008, Goldman has been a federally insured bank holding company that was bailed out of the financial crisis along with Citigroup, AIG and other financial giants whose exotic products and executive gluttony nearly choked to death the financial system.
"This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing," said Robert Khuzami, director of enforcement at the Securities and Exchange Commission, in announcing the largest penalty ever against a brokerage house.
The side bets are still underway on whether Goldman CEO Lloyd Blankfein will keep his job and how financiers will contend with sweeping new regulations passed by Congress this week.
But the people's verdict on Wall Street already has been rendered.
"A generation ago, their job was just to serve customers," said Phil Dow, equity market strategist at RBC Financial. "Now they have these proprietary trading desks, backing traders to make bets for their own accounts. And the bets usually don't have anything to do with economic fundamentals. The one important message from this: Wall Street by and large doesn't serve long-term investors."
Said Brian Belski, chief investment strategist at Oppenheimer Asset Management: "I tell people I'm from Willmar, Minnesota, not Wall Street! I mean, not everybody on Wall Street is bad. I just don't want to volunteer it, given the mood of the country."
Dow and Belski, who work for institutions that stayed out of trouble, make the larger point about what this latest round of scandals has done. The Goldmans and Citis and Merrills broke the public trust, which is the most important ingredient of capitalism, particularly among financial fiduciaries.
The Investment Company Institute reported several days ago that individual investors, based on mutual fund inflows, have largely avoided stock funds since the market rebounded in the aftermath of the 2008-09 crash that accompanied the financial crisis.
"I mean ... I and Wall Street did not make you buy that house a few years ago that you could not afford," said Belski, who commutes from his Eagan home weekly to New York. "But Mom and Pop in Willmar are not buying stocks because of what they see from the [Goldman CEO] Lloyd Blankfeins and others on TV. And for the last 10 years, U.S. investors have experienced two recessions, numerous instances of corporate greed and malfeasance and then almost the undoing of our financial system. And we have just come through the worst decade for the market since the 1930s."
Helping hyenas?
It's hard to blame working people for being wary about investing in corporate America every two weeks in the company 401(k) retirement plan. The Standard & Poor's 500 is down over the last decade.
"Today roughly 70 percent of trading volume is attributable to computerized fast-trading firms attempting to scalp part of the spread or through a discovery algorithm, a 'front-run' of major institutional order flow," lamented Dow in a recent advisory to investors. "Mother Nature doesn't equip hyenas with night-vision goggles or advance maps to wildebeest bivouac locations; should we allow such a predatory leg up to compromise the investment process?"
Good question.
History also shows that despite cataclysmic scandals and downswings, the American economy rebounds and the stock market rises. Some of the dirty traders and scammers have been found out. And Dow, Belski and other fundamental analysts, believe this is a good time to buy good companies.
"Wall Street works for its own pocketbook, not clients," said Mike Ducar, a retired portfolio manager from what is now known as Ameriprise Financial. "I'm more pessimistic than some of my friends still in the investment business. We've got to get through this period. But it's going to be a long, hard pull."
Disclosure: Despite my outrage at some kingpins of finance, the family retirement and college funds are riding on the American economy, mostly stock funds. The bet here is that good companies will prosper and grow, despite market gyrations. And that Main Street will triumph over the long haul.
Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com
