Stein has a new charge against Goldman Sachs this week: that it violated the precepts of fiduciary duty when it underwrote mortgage-backed securities at the same time as shorting them.
Stein does a good job of explaining what fiduciary duty is: it's the duty of a professional who is "handling someone else's money". But it's not long until he starts applying this concept to firms which were doing no such thing, like Drexel Burnham or "the bluest of the blue-chip brokerage firms and investment banks [who] placed excessive valuations on companies that they peddled to investors".
Ben, let me explain something to you. If I sell you something - whether it's a car or a house or a stock or a ham sandwich - I have no fiduciary responsibility to you. Caveat emptor, and all that. If I am investing your money on your behalf, then I have a fiduciary duty. Sometimes, investment banks (the "sell side") also own asset-management companies (the "buy side"). But if you're looking for fiduciaries, you're not going to find them on the sell side, only on the buy side.
Actually, while I'm at it, let me explain something else. If an investment bank underwrites a sale of securities, then the bank's client in that transaction is the issuer, not the investors. In an IPO, for instance, the issuer often pays the underwriter 7% of the proceeds. The investors, meanwhile, make their own decisions as to whether they think the stock is a good buy at the IPO price. If you want to get a good idea of who a bank is working for, just look to see who's paying them.
So when Stein accuses Wall Street banks of "betraying their clients' trust," he's simply confused about who the clients are, in these transactions. If I'm an investor and I buy a stock from a broker, then I'm buying it because I think the total amount of money I'm paying is a fair amount for that security. I'm completely agnostic about whom, exactly, I'm buying the stock from: if a different broker has the same security for a lower price, I'll go there instead. And I'm certainly not trusting the broker to assure me that my security will go up rather than down in value.
In fact, at the margin I actually like it if my broker is shorting that stock and thinks it will go down in value - because that just means that I get to buy it at a slightly cheaper level, and it also increases the chances of my benefiting from a short-covering rally.
But here's Stein:
Now, Goldman can spin this as "risk management" and insist that it was doing it to protect its stockholders. (Remember, though, that Goldman's lushly compensated traders and executives get a far larger share of the pie than we pitiful stockholders do.) But selling short the same securities or very similar ones that they were peddling to the clients is extremely hard to reconcile with basic fairness.
Actually, Goldman's compensation ratio is 43.9%, which means that "pitiful stockholders" get $1.28 for every dollar paid to "Goldman's lushly compensated traders and executives". And it's just ridiculous to think that "basic fairness" means that Goldman should be exposed to exactly the same risks as anybody who it sells securities to. Goldman Sachs isn't Berkshire Hathaway, investing money on behalf of shareholders. It's an investment bank: an intermediary between issuers and investors.
The point is this: Don't expect the securities firms, or the securities laws, to help clients who suffered huge losses.
Yes, Ben, that's exactly the point. If an investor buys any kind of financial security, he's deliberately buying a risk product. He gets all the upside if that security rises in value. But he also gets all the downside if that security falls in value. It's not the job of any securities firm to bail him out.
I do like the way that Goldman (isn't) reacting to Stein's provocations, though:
Goldman asserts that it did nothing wrong in its handling of C.M.O.'s, saying that most of the entities that bought them were highly sophisticated and capable of making their own investment decisions. Goldman declined to show me a list of its large buyers. It also offered no opinion on what its duties might be to small investors who were ultimately exposed to the C.M.O.'s it sold to larger entities.
Goldman emphatically says its short sales and similar trades were normal hedging operations. The firm declined to show me a chart of the scale of its short sales over the past several years.
If only I were capable of the same degree of self-control. But then Stein ends his column with this kind of flourish, and I just can't help myself:
Are we a nation if there is no meaningful restraint on what people can do with an offering statement and a computer screen inside our borders? We surely cannot remain a republic under law if there is no law except the axiom from "Richard II" that "they well deserve to have, that know the strong'st and surest way to get."
Are we a nation? Ahem. Ben, I do understand that you feel aggrieved at the size of the profits that Goldman Sachs made this year. But I can assure you that those profits pose no threat whatsoever to the United States' remaining "a republic under law". If you feel the need to descend into delirious hyperbole, there are lots of places you're more than welcome to do so. Just, please, don't do it in the New York Times.