The Demonization Of Goldman Sachs & The Profit Motive

One of the apparent casualties of last week's unprincipled bullying of Goldman Sachs personnel by a handful of Senators was the legitimacy of the profit motive in trading and investment banking.

Once you wade through the political posturing of the Senators, and their general inability to understand that which they excoriated, you are left with a Congressional disposition against professional investors in the capital markets making money by risking capital on positions over any timeframe.

To my recollection, nobody ever believed Salomon Brothers' original CMO activities, arranged between professional investors, were altruistic. Salomon was a hard-charging, take-no-prisoners investment bank. Nobody who traded with them as a principal, or bought their underwritings, thought the fixed-income titan was doing them a favor.

Simply put, trading with investment banks isn't a sport and it's not for naive or non-professional investors. And by "trading," I mean buying from an investment bank for the purpose of holding the security.

Every professional investor, including investment committees of unions and such, knows, or should know, that no investment bank underwrites or trades securities as a principal solely for the investor's benefit. The banks do these activities to make money. So that means they expect what they sell to fall in price, or rise less than what they buy, and what they buy to rise in price, or fall less than what they sell.

What is so hard to understand about this?

Unlike selling food, cars, or vacuum cleaners, the buying and selling of securities involves making judgements on the future performance of said securities. You buy food to eat. You buy securities as a store of value.

Thus, by definition, the seller of that store of value, if it is an investment bank acting for its own account, is implicitly telling you they have better options for their own money than holding that which they sell to you.

If the Abacus deal and subsequent witch hunts into Goldman Sachs' behavior by the SEC and Justice Department demonize the business of trading, as principals, by investment banks, we have a major disconnect between our elected and appointed dummies in Washington and the realities of capital markets.