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Investors' short memories permit Wall St. scandals Add to ...

A call from Goldman Sachs Group Inc. usually elicits a sharp pang of one of two basic responses hardwired in the brain of anyone who works in markets - fear and greed.

There are those who are thrilled to see that 212 number come up on the call display, because it could mean a chance to do business with the Wall Street firm viewed by so many as the best. The greed kicks in with the hope that Goldman will bestow from on high a chance to profit.

Then there are those who immediately get nervous when the phone rings, because they know that Goldman's reputation as the best results from coming out on top in most of the firm's trades.

It's the difference between those who enjoy the trip into a casino - the luxury, the free drinks, the complimentary rooms for high rollers, all the while blinding themselves to the reality that it's the lost bets of punters that cover the costs of all the goodies - and those who avoid places such as Las Vegas because they know the house usually wins.

Goldman's business depends on a ready supply of people who fall into the first category, because those in the second are too leery of doing trades with the New York-based giant.

There's much talk that the allegations by the U.S. Securities and Exchange Commission that Goldman committed fraud in selling a collateralized debt obligation will do big-time damage to Goldman's business by shrinking the pool of willing investors in that key group. Goldman has denied the SEC's civil fraud allegations and says it plans to fight them.

Wall Street's recent past has shown that firms usually survive such scandal, and surprisingly unscathed. They live on because customers choose to forget, or choose to rationalize, the behaviour of banks as, well, just what banks do.

But if the recent history of Wall Street tells us anything, it's that customers will still be happy to put their chips down at the House of Goldman.

It's hard to believe. Who would want to be the next ABN Amro or IKB, the European banks that ended up on the wrong side of the destined-for-doom derivative that the SEC alleges Goldman cooked up with a hedge fund that it then sold?

The allegations, if the SEC can prove them, would also seem to put the lie to the idea of Goldman as a place that lived by the words "long-term greedy," a phrase coined by one of the firm's legendary traders to codify a way of doing business that was supposed to eschew small short-term wins such as the $15-million (U.S.) fee the SEC says the firm got on the derivative deal to pursue big long-term gain by helping clients.

At least, that's how it's supposed to work, the wrongdoer boycotted by the wronged. However, Wall Street's recent past has shown that firms usually survive such scandal, and surprisingly unscathed. They live on because customers choose to forget, or choose to rationalize, the behaviour of banks as, well, just what banks do.

Goldman has run up against regulators numerous times. In 2003, the company was one of a group of 10 firms that settled with U.S. regulators over allegations that research analysts issued buy ratings not because they believed in companies but because they wanted to drum up investment banking business and fees from the companies. In that case, Goldman paid $50-million.

In 2005, Goldman and Morgan Stanley agreed to an $80-million settlement of SEC allegations that the firms improperly handled initial public offerings.

Goldman, Merrill Lynch and Deutsche Bank in 2008 agreed to settlements with the New York Attorney-General after being accused of misrepresenting some securities sold to investors as safe and cash-like, only to have them seize up during the credit crunch. Goldman agreed to buy back about $1.5-billion of the securities and pay a $22.5-million fine.

And how has this affected Goldman's ability to attract business? Net revenue rose from $16-billion in 2003 to $45.1-billion last year, according to the firm's annual reports.

Other examples abound of firms surviving and thriving. Credit Suisse First Boston, a powerhouse bank for initial public offerings in the tech boom, lived to tell about its brush with regulators. The SEC accused that company of essentially taking kickbacks from clients who were given pieces of the hottest IPOs. CSFB paid $100-million, and admitted no wrongdoing to settle the case.

The investment banking division of Credit Suisse, as CSFB is blandly called today, is still out there and is still a leader in IPOs in the United States and around the world.

In fact, not long after the settlement, CSFB won the right to co-lead the IPO of a little company called Google Inc.

Come to that, last I checked, Las Vegas is ticking along too.


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