I'm outraged, like most, that a culture of excess has crippled the US economic system. Honest people got the short end of the stick and something needs to change. We need more transparency from Wall Street and there should be a level playing field for all investors.
Like many investors, I've been watching the questioning of Goldman Sach's executives about their behavior during the financial meltdown. We've heard about their views and behavior during the mortgage crisis and have also learned about how investment decisions are made at Goldman. We've also watched legislator after legislator pound on Goldman to prove their outrage (a reflection of the anger felt on Main Street). But I think there's a huge missed opportunity in the questioning that needs to be said out loud; in too many cases they are wasting time asking the wrong questions! And now is the time for the right questions, not useless posturing.
I understand politics and the need to let constituents know that their elected officials share their outrage. But most of the questions surround how all businesses operate and how tactical decisions are made to best benefit shareholders and clients. Trying to get Goldman executives to say that they did not have a negative view on the housing market is an exercise in futility.
The reality is Goldman hedged their bets and some of these bets paid off in a huge way. That's what investment firms do and there is nothing wrong with that (unless the profits result from unethical actions). Making honest money is not a crime. Making dishonest money is and that’s where the spotlight should be. The focus should be on uncovering any alleged shady behavior, not condemning Goldman for tactical investment decisions.
To be sure, there is plenty to question about Goldman's behavior particularly about the amount of disclosure that was made to all parties in the transaction.
As Senator Levin pointed out; "You are betting against the same security you're out selling. You've got a short bet against that security, you don't think the client would care?"
Excellent point. And goes to the heart of transparency.
For that reason, it's completely reasonable that an investigation seeks to uncover who knew what and what was shared with each party. Disclosure is at the heart of trust and proper disclosure is critical if a firm is to maintain credibility. This is a productive line of questioning. I say dig as deep as needed to find out the truth.
It's also reasonable to question the impact that firms have on the overall financial system. Too big to fail should be killed and, if the system allowed this, the system should be changed. Companies should not have the power or the weight to sway the fortunes of the overall economy. But remember this is a job for regulators and should not be dependent on the altruism of businesses. Goldman did nothing wrong in expanding their reach as allowed by law. If they behaved in a way that impacted the system because of less than scrupulous behavior, that's another issue entirely. That is where the focus should be. The nature of a free market system is that business does its best to be profitable and there's nothing wrong with that as long as the behavior is ethical.
Yes, the current hearings are an investigation to find out if Goldman acted in an ethical manner and that's completely reasonable. And that's where the spotlight should stay. To tar and feather Goldman because they took positions they believed would be profitable is missing the mark. That's what financial firms do. And in a free market economy, every time someone buys something, there is a seller. Therefore, there is someone with an opposite viewpoint. Don't be convinced by the political outrage that that's not how the world works because it does in every business. Someone buys and someone sells. It should be done ethically to be sure and asking questions to see if this occurred is vital.
Instead of wasting time on unproductive questioning, lets hope that the hearings now focus more intently on disclosure. That's the real issue here. Maybe I'm being far too idealistic but as a citizen (who just happens to be in the sell side investment community), I'm interested in the discovery of any truth that can help the system be more stable and less impacted by questionable behavior. It is not the time for posturing; the stakes are too high. We need protection not posturing. And let's hope that as the investigation continues, that's what we get.
Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at firstname.lastname@example.org.