Goldman Goes for the Gold

In case we need more evidence that the system is broken, we got it this week in the case of Goldman Sachs and Facebook vs. the free world.

Earlier this week the venerable Wall Street financial institution announced it was investing $450 million of its own money in Facebook, the privately held internet social networking phenomenon. In addition, Goldman agreed to raise an additional $1.5 billion for Facebook from their well-heeled Rolodex of private clients.

At first glance one might think the deal is an example of the world's leading investment bank performing its economic function of raising capital for a young company in need of cash to expand. But a closer look shows how the world has changed, and how corrupted that process has become. And sadly how Goldman Sachs, the one time acknowledged leader in ethical conduct on Wall Street, has come to exemplify the loss of perspective, sense of entitlement, and unmitigated greed that has led Americans to lose their patience with the financial community.

The Securities and Exchange Commission has rules requiring disclosure of certain information for any company with more than 500 investors. In order to circumvent these rules, Goldman Sachs is creating a single entity "Special Investment Vehicle" (SIV) whose sole purpose is to funnel the $1.5 billion its customers will invest in Facebook. Though there may be hundreds of investors in the SIV, Facebook will count it as only one shareholder. Clearly this violates the intent, if not the letter, of the SEC rules.

Further, Goldman Sachs has given their customers 96 hours to commit to invest in the Facebook SIV. Under normal circumstances, investors are given a minimum of weeks (and generally months) to make such a commitment. Even more shockingly, prospective investors are typically given a Private Placement Memorandum to review before being asked to make such an investment decision. This document describes the investment -- the company, its financial history, the plans for the money to be raised, terms of the proposed investment and other relevant information. No such document has yet been produced for the Facebook investment. Unlike Goldman Sachs, it seems their clients must make their decisions based upon only publicly available information and news reports.

Lastly, Goldman can sell its $450 million stake in Facebook at any time it wishes without even disclosing the sale. Their customers who invest in the SIV, however, must wait until 180 days after Facebook goes public before selling their investments, which could be many years.

All these "inconvenient truths" describe ethical compromises and conflicts of interest that Goldman Sachs have with their clients in this transaction. They also demonstrate just how far Goldman Sachs has fallen.

There was a time not long ago when no Wall Street investment bank would have sponsored a deal on such terms. The one time poster child has lost its way. But then again, "doing Gods work" as Lloyd Blankfein so aptly put it not long ago, can be too complicated for the rest of us to understand.

On the other hand, perhaps there is an easier explanation. As one friend put it, "Goldman Sachs cares about Goldman Sachs. They don't give a 'rats ass' about their clients" (or anyone else, it seems).