Goldman Sachs And Legality Vs. Morality

There is a lot of debate about whether Goldman Sachs is guilty of fraud and securities violations. Every legal expert I have read has said the SEC has a hard case to make, which may be why only three of the five SEC Commissioners voted for proceeding with the prosecution. The issues of the case are not clear. It revolves around whether Goldman Sachs properly disclosed information to both sides of trades on complex instruments (Collaterized Debt Obligations, or CDOs) that bundled mortgages.

Stepping back for a moment, I know that when I sell a stock, I am happy someone on the other end of the trade buys it. If no one buys my shares, I have a problem. I know Goldman Sachs is not supposed to reveal the identity of trading partners. I know Goldman Sachs was the only company that made money when the housing bubble burst, so they read the market properly. I know making money in a downturn made their clients happy. From that perspective, it seems clear. Goldman Sachs did nothing wrong.

Everything above makes sense until you read the self-congratulatory e-mails among the traders. The e-mails from Fabrice Tourre and others will leave you, at best, feeling uncomfortable. At this point, “wrong” takes a left turn from black-letter law into the very subjective territory of morality. Was it immoral to profit from the misfortune of thousands of homeowners or was it smart business?

From a leadership perspective, morality and corporate ethics at Goldman Sachs (or any company) is a tricky business. SEC prosecutions or congressional hearings are not a solution. Even new legislation fails, because law is a weak bulwark against immorality. Bad people find a way to break laws. All the current controls did not stop Bernie Madoff or Richard Stanford.

Morality is a cultural issue. Who will own it in the corporate setting? Will it fall to the Human Resources function or Corporate Responsibility function? We all know the so-called “tone at the top” from the C-suite counts, but which group will manage the message throughout the company?

People in long black robes will decide if what Goldman Sachs did was illegal. You need to decide if you personally feel it was immoral. Did Goldman Sachs aspire to the culture we see in these e-mails, or was this the work of a single bad actor? In Goldman and other companies, who will own the responsibility for the moral and ethical spirit of the organization is an important issue in business leadership.

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