Even if GS wins/survives the lawsuits, it will not be as powerful as it was.
In their attempt to do "God's work", perhaps they lost track of what their real job was. You cannot do what's in your clients best interest if everyone is your client, especially if you force them all to agree to allow you to front run them if you so choose.
GS's clients are like victims of abuse who are under the powerful spell of their abuser to the point that they think they are benefiting from them. The system worked out when there was enough money to share around, so clients still had some 'profits', but eventually the sham of CDOs and other worthless paper caught up with everyone and it was clear who really profited. As the victims wake up and realise that they are on the losing end of the contract, they will fight back.
A bank's value is mostly derived from its people and its reputation, as with any service industry, and those who forget that will eventually pay for it. I suspect the client defections will start snowballing now, with AIG having recently let GS go. Employee defections will also increase, as all those stock options that they own lose value.
From the FT:
To recap: the biggest intraday point drop in the Dow’s history was caused by machines responding to a myriad of data points that humans were unable to influence. George Orwell would have been proud. As for Goldman, it is fitting that a company that built much of its recent success on its ability to arbitrage information from different parts of the market should get in trouble for, well, arbitraging information. The SEC’s charges– that Goldman did not tell one of the investors in the mortgage-backed deal that a hedge fund seeking to sell the security short had had a hand in crafting it – are far from a slam-dunk fraud case.
But they do reinforce a perception that Goldman’s rivals – and even its clients – have had for years: by using its smarts and brand to position itself at the centre of information flows, and refusing to share that intelligence equally with its counterparties, Goldman gains an invaluable edge over the market.
Profiting from asymmetrical information is not, in itself, illegal but it does clash head-on with the bank’s oft-repeated mantra that its “clients’ interests always come first”. The question for Goldman is: which clients’ interests come first – those who want to buy into a security or those who want to short it?
In its quest to become the all-seeing eye of the market, Goldman might have lost sight of the most important nugget of information: who its clients actually are.
Disclosure: no positions