"Buy" Means "Sell" in Goldman's World

Watching the testimony of Goldman Sachs officials before a Senate subcommittee this week, I couldn’t help thinking of George Orwell.

He, of course, was the great English writer of Animal Farm and 1984, which we all read in school.

Orwell understood better than anyone the pernicious language of euphemism. You might remember the phrases “doublethink,” “war is peace; freedom is slavery,” and “Big Brother is watching you,” which chillingly captured the obfuscations of totalitarian regimes in the early days of the Cold War.

But a less-well-known essay of his, “Politics and the English Language,” kept running through my mind as I watched witnesses go before the cameras Tuesday. It was striking how few of the present and former traders and executives grilled by senators for more than ten hours could give direct answers to simple questions.

“The great enemy of clear language is insincerity,” Orwell wrote in that essay. “When there is a gap between one's real and one's declared aims, one turns as it were instinctively to long words and exhausted idioms, like a cuttlefish spurting out ink.”

And there were buckets and buckets of black ink spurted out in the hearing room Tuesday as the Senate Permanent Subcommittee on Investigations interviewed Goldman chief executive officer Lloyd Blankfein; chief financial officer David Viniar, and several present and former denizens of Goldman’s mortgage desk, ground zero of the controversy that has shaken the firm to its roots.

At times it seemed like inquisitors and witnesses lived on two planets, speaking two different tongues.

The Goldman executives spoke the rarefied language of Wall Street as they tried unsuccessfully to explain their business model to an audience that must have been scratching their heads when they weren’t reaching for their remotes. They clung to a thin reed of a defense, that they were above-it-all “market makers” whose only responsibility was to give clients the best price on any deal.

The self-righteous senators tried to cloak themselves in the language of Main Street, using down-to-earth idioms and even salty language—quoted from internal Goldman e-mails—that would have gotten Howard Stern thrown off the air a few years ago.

The whole exercise proved how removed Goldman and Wall Street are from the most basic standards by which the rest of us to do business, and how unaware they seemed to be of it. Except occasionally for Blankfein and Viniar, Goldman’s witnesses couldn’t say whether what they were doing was right or wrong, or whether they were obliged to tell the truth to clients about deals they were selling them.

That became very clear from early in the hearings, when four present or former mortgage traders and salesmen gave their testimony. These were the people in the trenches who actually did the deals. They included Daniel Sparks, who headed up the mortgage desk for nearly two years before resigning in 2008; former trader Joshua Birnbaum; managing director Michael Swenson, and of course Fabrice “Fabulous Fab” Tourre, whom the Securities and Exchange Commission named as a defendant along with Goldman in the civil case it filed a couple of weeks ago.

Both Goldman and Tourre have repeatedly denied wrongdoing and have vowed to fight the SEC’s charges in court.

All four young men were lawyered up to their ears and rarely departed from their scripts. At times some appeared to have utter contempt for the proceeding and the elected officials who ran it. In this hearing room, at least, they seemed possessed of an icy brilliance, lacking the testosterone-fueled animal spirits that prompted Tom Wolfe’s Masters of the Universe to go “braying for money” in the bond pits. But that was 20 years ago.

Senator Susan Collins (R-Me.) asked all four the same question:

“Could you give me a ‘yes’ or ‘no’ to whether you considered yourself to have a duty to act in the best interest of your clients?”

Only Birnbaum, who appeared to fancy himself a latter-day Hank Rearden from Ayn Rand’s Atlas Shrugged, said: “Not only do I believe that we do; I believe that we did.”

Here’s Sparks: “I believe we have a duty to serve our clients well.”

And Swenson: “I believe it is our responsibility as market makers to provide a market-level bid and offer to our clients and to serve our clients in helping them transact at levels that are fair market prices and help meet their needs.”

Finally, Fabulous Fab: “I believe we have a duty to serve our clients and with respect to our role as market makers to show prices to our clients and to offer them liquidity. I do not believe we were acting as investment advisers.”

In other words, don’t blame us; we’re just the market makers.

“I felt that they evaded a lot of the questions and were not very straightforward,” Sen. Collins told Matt Lauer on Wednesday’s Today show. “They were truthful in a sense and they also avoided answering whenever they could, and most of all, I was struck by the fact that they did not take responsibility for their actions, nor did they acknowledge their conflicts of interests.”

Again and again the subcommittee chairman, Senator Carl Levin (D-Mich.) asked the same question: “Don’t you also have a duty to disclose an adverse interest to your client?” In other words, did Goldman owe it to clients to tell them it or other clients were short on instruments it was selling them?

He never got a direct answer to that question, because it’s obvious what that would have been: no.

The hearings showed clearly that Goldman and other big Wall Street firms are wearing so many hats—market maker, underwriter, money manager, investment advisor—and are now handling financial instruments so complex that it has become impossible to sort out their most basic conflicts of interests and their most fundamental obligations to customers.

As I wrote last week, Wall Street now has become more transactional- and less relationship-oriented, and more geared to helping hedge funds than traditional institutions.

Fabrice Tourre captured that perfectly in an e-mail read at the hearing. Tourre and Goldman, remember, have based much of their defense on the claim that their clients were all “sophisticated” institutions that knew what they wanted.

But his December 28, 2006 e-mail said the firm should not focus on “sophisticated hedge funds” as potential customers, because “a. most of the time they will be on the same side of the trade as we will, and b. they know exactly how things work and will not let us work for too much money vs. buy-and-hold, ratings-based buyers.”

“This sounds like a deliberate attempt to sell [complex] products to less sophisticated clients who would not understand the products as well, so that you could make more money,” Sen. Collins said.

Or, as George Orwell might have put it: All clients are equal, but some clients are more equal than others.

Howard R. Gold is executive editor of MoneyShow.com. The opinions expressed here are his own.