The SEC is turning up the heat on Goldman Sachs for their role in the financial meltdown related to the subprime crisis. The Guardian reports::

“[Senator] Levin turned up the heat on Goldman by releasing emails which he said showed that, – contrary to statements in its 2009 annual report – the bank ‘made a lot of money by betting against the mortgage market’. He said the bank’s behaviour had the effect of ‘magnifying and spreading risk throughout the financial system, and that Goldman was ‘all too often betting against the instruments they sold and profiting at the expense of their clients'”.

The above video gives some background about Wall Street, what Goldman Sachs did, and questions the practices of “financial innovation.” The take is somewhat an apologist position, but it does highlight the how we should all should be wary of having unyielding faith in markets.

The crux of the matter is that financial institutions are more about sales and marketing than their own client interests. There doesn’t have to be any “smoking gun” memos. These are bright people hired to game the system. In my Money & Banking {Economics} course I took way back in 1991, we learned that getting around regulation was the basis for financial innovations. We learned strategies, but within a mantra that there must be a faith in the market. Of course, I never worked in finance and this was before the hedge fund copula formulas were commonly used, but I do know how organizations work. The bright people in finance knew what could be done to ensure they looked good, their bosses looked good, and the firm made money. Tacitly.

What the video illuminates is how widespread these practices are. In my mind, the firm and its profits took precedence over the implications for the market—market failure. In order to control for market failure—enter the ‘r’ word, regulation. Insider trading laws are all about controlling insider trading, i.e., trading on information that’s not public knowledge. The penalties are stiff. Why? Trading with insider information distorts the market and reduces faith in the market.

Should firms be allowed to spread risk and use marketing tactics to do it? Isn’t this just business -or- does it do violence to a faith in the market? Let’s see how this plays out with the SEC, the courts, and Congress. My take is that the sophistication and technology of Wall Street has far outpaced the current regulatory framework. Let’s restore the faith in the market and if this means the playing field is levelled and the paths to profits through creative chicanery are over, boo-hoo, so be it.

Twitterversion:: Goldman Sucks. Use of sales & marketing to dump risk on the market = #fail. Paving way for regulation? #ThickCulture @Prof_K

Song:: Eno/Byrne-‘America Is Waiting’