What we mean by 'socially responsible'
Q: Goldman Sachs promises to put customers' interests first. At the same time, Goldman was able to avoid serious financial trouble by hedging positions in ways that placed bets against clients. Do Goldman's leaders need a new business strategy, or do they need to just do a better job at explaining their business to regulators and the public?
Trust is essential in today's business environment - and understanding is essential to trust. Unfortunately for Goldman Sachs, collateralized debt obligations (CDOs) - the financial instruments at the center of SEC charges that Goldman hid information from, and then bet against, its clients - simply aren't understood by a majority of Americans. Given the level of sophistication of Goldman's clientele, that might not seem like such a big deal. But should the average Americans who contribute to the massive pension funds and other shared investment vehicles that depend on Goldman for sound advice get an inkling - rightly or wrongly - that they've been mislead, the investment banking giant could start to see its business moving across "The Street."
As was evidenced by the split SEC decision that led to the charges in the first place, there's a very real possibility that Goldman did nothing illegal in facilitating the transaction in question. After all, in order for a CDO to exist, there must, by definition, be one party betting that a security will gain value and another betting the other way. Furthermore, failing to hedge against losses in the subprime mortgage market is precisely what got so many banks into trouble in the first place - and if what Goldman says is true, the bank did take a net loss (albeit a smaller one than those who took long positions) when the subprime market crashed.
Is it likely that a majority of Americans understand this? No. But they sure know what to make of leaked e-mails expressing Goldman employees' elation that the bank was making money while most of us were losing our shirts.
The fact that Goldman continues to be profitable tells me their problem is one of communications deficiencies, not business strategy. For much of its existence, the American people simply haven't understood how Goldman operates. Now, that luxury is no longer an option, and Goldman must do a better job of articulating how it generates the wealth, jobs, and tax revenues that are shared by all of us.
Americans are increasingly demanding not just profitability, but social responsibility, from the companies they choose to do business with. That means companies such as Goldman must consider the general welfare in every business decision and identify avenues for reinvestment in America - and communicate those efforts far and wide.
That's a lot easier to understand than an explanation of arcane financial instruments. And a better understanding of its practices is precisely what Goldman needs to achieve to regain the public's trust.
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