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Is what Goldman Sachs did nothing but gambling?

Lawmakers at the Goldman Sachs hearing repeatedly compared the activities of investment banks to gambling. But that's not how Goldman officials view it. Here's how both sides argue the issue.

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The further trading activity gets from the real economy, the closer it resembles blackjack, in the view of many lawmakers. In particular, Levin continually objected to Goldman’s short selling of a housing synthetic CDO the bank was marketing to customers.

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“You are betting against the very security that you’re selling,” said Levin.

Why Blankfein’s not a bookie

To investment professionals, the context in which the buying and selling of securities takes place makes it very different from Las Vegas.

Trading synthetic CDOs is not analogous to betting on a hamburger-eating contest, say. Investors purchase these products as a means of protecting themselves against swings in the price of the underlying asset. Generally speaking, they are part of a complicated investment strategy – not a bet in and of themselves. Thus automakers can hedge against swings in the price of steel, or beverage manufacturers can try to make sure they’re not hurt badly by a rise in corn syrup.

“What clients are buying or customers are buying is an exposure,” said Blankfein on Tuesday. “The thing that we are selling to them is supposed to give them the risk that they want.”

It’s true that learning to be good at poker is one way to prepare oneself for life as a Wall Street trader, notes Robert Brusca, an economist for Fact & Opinion Economics in New York. But senators on Tuesday got tripped up and appeared confused about Goldman’s various roles in the financial markets, said Mr. Brusca in an analysis of Blankfein’s appearance at the Senate hearing.

Lawmakers also put too much emphasis on the blunt talk contained in Goldman e-mails released by the Senate Homeland Security and Governmental Affairs Committee's Permanent Subcommittee on Investigations. Obscenities and denigration of one’s own products are common among all kinds of salespeople – not just securities dealers, notes Brusca.

“The key here should be for the senators to pursue those charges that have to do with securities law violations or that have real moral character problems. They seem to have lost their way, although they did score some points,” writes Brusca.

Related:

Goldman Sachs hearing: Is Congress missing the point?

Goldman Sachs hearing pulls back curtain on bankers' ethics

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