A new heart attack is available at KFC! The Double Down features two pieces of fried chicken, bacon, an indistinguishable mixture of cheese, and an unidentifiable sauce to now bring you a sandwich as close to toxic as the American fast food business has ever been. Unfortunately KFC neglected to complement the Double Down with a side of Lipitor. Nonetheless, don’t expect the Double Down to be a big hit at Goldman Sachs.
Like KFC, Goldman is in the business of selling cutting-edge poisonous products – not purchasing them – all to add a few extra zeros to the bottom line. Fortune Magazine reported that Goldman raked in mere $1 billion in fees from its sale of collateralized debt obligations (CDOs) last year, which pales in comparison to its $12 billion in profit for the year. Rather than including a disclosure of the true risk behind these securities, Goldman went ahead and sold them with a Triple-A rating. I hate when they forget to put the toy in with the Happy Meal.
While Goldman was wrong for not fully disclosing the true risk behind the CDOs, the financial giant is not in the wrong for having put them on the market. As it should, the SEC has filed charges of fraud against Goldman, which, however, should not to be confused with charges against Goldman for the actual sale of CDOs and other now-worthless mortgage-backed securities. Creating a product that people want and selling it to them – so long as they know what they are getting themselves into – is perfectly acceptable, and it falls on the individual to make informed consumption decisions.
Take the tobacco industry for example. In the past, consumers were buying cigarettes under the false understanding that cigarettes had no long term health effects. When it came to light that cigarettes were in fact dangerous and caused cancer, Big Tobacco faced class action lawsuits and multibillion dollar settlements due to its inadequate disclosure of the health risks of smoking cigarettes. In a very similar fashion to that of Big Tobacco, Goldman now faces a lawsuit for its own misleading statements and marketing materials regarding the financial risk of investing in CDOs.
Although it may be considered unethical, Goldman cannot be blamed for the actual selling of CDOs and other mortgage-backed securities. Like the fast-food and tobacco products, financial investment products carry a certain level of risk, and consumers electing to purchase the product assume the attached risk. Although firms may be frowned upon for selling the above-mentioned products, it is ultimately the choice of the consumer to make the purchase. Without buyers, there would be no sellers, and businesses cannot be blamed for making a product that consumers want to buy.
Had Goldman provided truthful and accurate information as to the true risk of the financial products it was selling, it would not be in the wrong and very likely not facing any charges from the SEC. Just as cigarettes may give you lung cancer and fast food may cause you to gain weight, financial investment products may cause you to lose money. So long as the customers are fully aware of any and all risk associated with their purchasing and consumption decisions, transactions involving these types of products are completely allowable.
It is the function of businesses in an economy to provide a wide variety of goods and services, and consumers ultimately must make informed purchase decisions for themselves. Others can always be blamed for incorrect or poor decisions, but at the end of the day, it is the individual who gives the final stamp of approval. Although investors are right in pointing fingers at companies like Goldman in this situation, it is important to remember to be very careful going forward. Read the side of the cigarette carton, read the nutrition facts before going through the drive-thru, and thoroughly research before making investment decisions.
