In Defense of Goldman Sachs (Sort Of)

07/04/2010 05:12 am ET | Updated May 25, 2011

It seems like everyone is piling on Goldman Sachs as the poster child for greed and duplicity. It is getting clobbered in the court of public opinion, which may be more important than the more traditional court where it is headed, unless it settles its dispute with the SEC (which is likely).

It's hard to feel sorry for the most successful investment bank in the world. For the first quarter of the year, it had net revenues of almost $13 billion and net earnings of more than $3.4 billion. Given its stellar financial performance, you have to ask: Is envy fueling the firestorm of public opinion or is the SEC's view of its conduct legitimate?

Initially, whether or not its conduct was illegal, it is hard to make the case that Goldman Sachs lived up to its own business principles. According to its web page, "Our clients' interests always come first" and "Integrity and honesty are at the heart of our business." Sounds impressive.

The reality is quite different. Lloyd C. Blankfein, the Chairman and CEO of Goldman, testified before the Financial Crisis Inquiry Commission on January 13, 2010. Blankfein is reported to have stated that Goldman did not have a legal obligation to disclose when it was betting against the securities it was selling because "[W]e are not a fiduciary."

He is right. Brokers (unlike investment advisers) are not held to a fiduciary standard. They can have conflicts of interest. They don't have to act in the best interest of their clients.

In the same testimony, Blankfein supported the extension of a fiduciary standard to brokers.

Confusing, isn't it?

When seeking clients, brokers tell them to trust them because they "put their interests first." When it turns out this is not true, the lawyers explain they have no legal obligation to do so.

Whether or not this defense will fly for Goldman is irrelevant to the core issue: Why do investors do business with brokers who say one thing to get their business and rely on a lower legal standard to avoid accountability for their misconduct?

Goldman may well have a valid legal defense to the SEC's allegations of wrongdoing. That's my tepid defense of its conduct.

You have no defense if you continue to rely on a broker or adviser who won't confirm in writing that they will be held to a fiduciary standard.

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