Risky Business

Investment banks routinely bet on both sides of a transaction, going “long” (betting that the investment will do well) while simultaneously going “short” (betting that the investment will do poorly).

Wise risk management is neither illegal nor unethical. In 2007, while other top banks lost big money in mortgages, Goldman Sachs profited. How? Essentially by making heavier negative than positive bets in the housing market. One “big short” alone earned Goldman nearly $400 million.

Today, many investment vehicles are too technically complex for average people to understand. In its so-called “non-synthetic” form, for example, a collateralized debt obligation mixes bonds and other assets into different types of debts (known in the trade as tranches or slices) and credit risks. Professional investment managers swap C.D.O.’s the way little boys once swapped baseball cards. There is nothing inherently tainted about such high-finance business.

But in mid-April, the Securities and Exchange Commission filed a security-fraud complaint against Goldman. In Senate hearings triggered by the complaint, members of the subcommittee on investigations hammered Goldman officials with the allegation that they had improperly failed to disclose how the firm was shorting mortgage assets.

In one now widely publicized e-mail sent in 2007, a top Goldman trader joked about getting unwitting “widows and orphans” to make investments in the imploding housing market and quoted another top Goldman manager as having boasted that “the poor little subprime borrowers will not last so long!!!”

It is not news that Wall Street is home to some highly intelligent but unethical individuals who are supremely greedy and don’t give a damn for the needy.

What is news, however, is that whether they committed crimes or not, the Goldman officials who testified in the Senate last month, including the two young men whose words were recorded in the aforementioned 2007 e-mail, seemed sincerely and hence eerily bereft of any appreciation for the Golden Rule.

“So in everything, do unto others what you would have them do to you, for this sums up the Law and the Prophets.” This “do unto others” teaching by Jesus (Mt 7:12) is taught by most major religions and informs everyday moral discourse. What parent has not admonished a child, “How would you like it if somebody treated you that way?” What coach has not exhorted a team to play hard but play fair?

Yet the only “mistakes” to which these witnesses would admit were analytical, not ethical. Even allowing for coaching by lawyers, they seemed authentically without any ethical compass for understanding why inducing people to invest in something that you knew would fail, treating double-dealing as if it were a proprietary strategy or trade secret and profiting in the bargain while mocking innocent others who lost everything (homes, jobs, life savings) would be immoral.

In the encyclical “Quadragesimo Anno” (1931), published during the Great Depression, Pope Pius XI observed: “The laws passed to promote corporate business, while dividing and limiting the risk of business, have given rise to the most sordid license.”

Those words are even more striking today than they were back then. For in our fast-paced, high-tech, global economy, Golden Rule morality is a requisite condition for financial stability. To work at all well, the 21st century’s transnational free markets must be ever more confidently and widely viewed as fair markets, in which investing involves risks but is not easily rigged against anyone or any group.

Washington needs to enact far-reaching regulations that discipline financial movers and shakers and impose criminal penalties for any double-dealing shenanigans.

On his popular radiobroadcast “Breakpoint,” my friend Charles W. Colson, an evangelical Christian leader and free-market conservative, recently called for new federal regulations on financial institutions. Catholic bishops should lock arms with Colson and other religious leaders on this issue.

American capitalism cannot survive economic life absent the Golden Rule. If not by moral custom then by legal coercion, “Do unto others” behavioral norms must be followed not only on Main Street but also on Wall Street.

This article appears in May 31 2010.