"In Today's World, Does Character Matter?"

Sydney M. Williams

Thought of the Day

“In Today’s World, Does Character Matter?”

April 27, 2010

We live in a world where trades are executed in milliseconds for gains that are unrecognizable without a microscope, yet the participants can make millions, because hundreds of millions are involved. We live in a world in which investment managers can write insurance on investments in which they have no economic interest. We live in a world in which banks trade securities that create no economic value. We live in a world that seemingly has no time for “character” or “judgment”.

We have come a long ways – and perhaps not completely for the better – from a time when John Pierpont Morgan went before the Pujo Committee in 1912. Representative Arsene Pujo (Democrat from Louisiana) was investigating the crash of 1907. The Committee’s counsel, Samuel Untermyer was interviewing Mr. Morgan.

Mr. Untermyer: “Is not credit based primarily upon money or property?”
Mr. Morgan: “No, sir. The first thing is character.”
Mr. Untermyer: “Before money or property?”
Mr. Morgan: “Before money or anything else. Money cannot buy it.”

Goldman Sachs’ executives, led by CEO Lloyd Blankfein, will be marched before Senator Carl Levin’s (Democrat from Michigan) Permanent Subcommittee on Investigations, this morning. The leaking of e-mails prior to the session and Mr. Levin’s comment that Goldman “dumped toxic mortgages into the system” has set the tone. While the purpose allegedly is to determine the root causes of the financial meltdown of 2008, there is little question that the upcoming mid-term elections play a role. Wall Street is a convenient punching bag, and knocking the Street plays well in populist politics. Democrats (who in 2008 extracted twice as much money as Republicans from Wall Street) are anxious to make those same Republicans appear as agents of the monied classes.

There is a second agenda on the part of Democrats in the circus we will all be watching this morning, and Walt Kelly’s Pogo provides a clue. He once declared: “We have met the enemy and he is us!” Mr. Levin may accuse Goldman of “dumping toxic mortgages”, but it begs the question as to who created the mortgages? The answer to that question leads directly to Fannie Mae (FNM) and Freddie Mac (FRE) – sensitive subjects to Democratic leaders, especially Senator Chris Dodd and Representative Barney Frank. It reminds us that, while reform is needed – particularly in terms of increased capital requirements along with greater regulation and visibility in terms of derivatives – reform that excludes FNM and FRE and provides advantages to large banks at the expense of smaller ones is not reform that addresses the root cause of the credit collapse. Like the Health Care Bill, obfuscation appears the hallmark of the new Administration.

While there is little question in my mind that Goldman can be accused of ethical lapses, it seems uncertain as to whether it will be proven that they broke the law. A broker is, after all, a broker. The clients with whom they were dealing were “sophisticated”. Losing money is not an excuse (no more than making money is evil) and does not necessarily warrant restitution. At the time of the trades – in early 2007 – most people were still positive on housing, including, I might add, Fannie Mae and Freddie Mac.

Wall Street firms do gain intelligence, however, from their clients. When a broker acts purely as an agent (as opposed to acting as principal) patterns in customer trading can be detected. Such intelligence is not always accurate, for “smart” clients can make “not-so-smart” trades and “not-so-smart” clients can make “smart” trades. But over time, and particularly applicable to large brokers, such intelligence can be gained and will influence activity. It is natural and inevitable.

So this morning, expect some sparring, but not much contrition, or answers. As in most other endeavors, location is important and Congressional members seated on a dais, looking down at their victims, creates a disadvantage to the witnesses. It is the character and judgment of both inquisitor and those seated before them that we will observe. As well, Congress is expert at destroying reputations and in that regard I am sure they will succeed.