Last week, the Securities and Exchange Commission filed a civil lawsuit against Goldman Sachs, charging that the investment bank “sold investors a subprime-mortgage investment that was secretly designed to lose value.”
The SEC’s actions set the stage for a protracted legal battle whose outcome is far from certain. What is certain is that, absent a change in the moral climate in Wall Street—and in all of American life for that matter—no amount of litigation will give investors the confidence we need for a healthy financial sector.
The SEC charges that Goldman Sachs sold investments containing mortgage-backed securities, which was, and is, perfectly legal. Goldman’s alleged violation of securities law lies in the accusation that Goldman was, at the same time, betting that the investments would decline in value. Thus, while investors lost nearly $1 billion, one of Goldman’s prime clients made a billion dollars.
Goldman claims the charges are “unfounded in law and fact.” This did little to calm investors, who sent not only Goldman’s stock but the rest of the market “reeling” after the announcement.
It’s easy to see why. As MIT professor Simon Johnson told the AP, the lawsuit “undermines” Goldman’s brand. What’s more, once the SEC starts digging via the process lawyers call “discovery,” who knows what they might find. Investors are right to be spooked.
But this issue goes far beyond investor confidence. If the SEC’s allegations are true, then at the very least we are witnessing a real breakdown in ethics—people, ordinary men and women, failing to “do the right thing.” In one sense, this ought not to shock us because an essential part of true ethics is the belief that ethics are grounded in some transcendent authority. And this belief in a transcendent authority is clearly on the wane in postmodern American life.
This is not an academic or esoteric issue. When people are no longer restrained by objective notions of right and wrong, nothing is safe—not your investments, not your house, not your neighborhood, not you! What we’re talking about, ultimately, is the moral consensus upon which the rule of law rests—that’s the very foundation block of Western governments and societies.
When ethics fail in the commercial markets, more and more stringent regulations are certain to follow. It’s the only way to assure the integrity of financial and commercial transactions. But we lose freedom in the process.
The problem is that regulation, however well intended, can’t solve the ethical problem. The best regulation can do is to define what people can get away with by drawing a line they can’t cross. It does not answer the question, “What is the honest way to do business?”
Ethics are so vital to a healthy culture that Professor Robbie George and I—along with Brit Hume—are filming a teaching series on ethics at Princeton. It will be available in the fall, and I’ll tell you more about it in coming months.