Every now and again, the true mindset that exists on Wall Street escapes out into the wider world. That happened today within the context of Goldman’s now-scuttled private placement of Facebook stock. Read this line from today’s story in the Wall Street Journal on the deal:
Goldman worried that the media spotlight surrounding the private offering might violate U.S. securities laws and expose the firm to legal action.
So, can we assume that had there not been a media spotlight, Goldman wouldn’t have worried about violating securities laws? If you’ve been around for the past five years, or 10, or 20, or 40, you know the answer to that question.
There’s no doubt this was a back-door IPO, and I’m sure Facebook, Goldman and the rich clients it was pitching the deal to all thought they were pulling a fast one and getting over on the system. But there’s so much hype and hysteria over Facebook that it once it all splashed onto the front page, so to speak, the jig was up.
“Wall Street” is a nice movie with a memoriable performance by Michael Douglas, but it doesn’t even begin to get at the heart of the matter. This is, incidentally, why the government must impose rules on Wall Street. Why leaving derivatives unregulated in 2000 was such a huge mistake, why lifting the leverage ratios on the investment banks in 2005 was such a big mistake. Left unregulated, there is nothing these guys won’t do to turn a profit.
Yves Smith, who knows far more about this stuff than I do, sums it up over at naked capitalism:
But perversely, Goldman’s truthiness is an accurate account of the real state of affairs. Goldman sees that securities regs operate in the world of Schrodinger’s cat, where legality is in an indeterminate state until someone takes the trouble to look. And that remains true of what happened during much of the crisis. Tom Adams and I have written long form of the abuses that took place in CDOs, including probable market manipulation, lack of arm’s length pricing, and collusion by CDO managers, and we have argued separately that CDOs were the driver of the toxic phase of the subprime bubble. But no one seems willing to go there because the forensic work looks to be too daunting.