The Rupp Report: Traceability Versus Transparency
Jürg Rupp, Executive Editor
In the last few years, the public opinion event went even further: total transparency from fiber to finished apparel entered the global textile markets. Carbon footprint, life cycle analysis, and many more expressions are completely fashionable these days. And a new word — at least for the textile community — snuck into the heads of the big retail players: traceability. Traceability is in a way even more decisive than "just" transparency. It should really track the whole life cycle of a certain textile product. Again, with this trend, the attitude of the buyers and sellers has changed again. Producers were and are forced to open up their way of the production chain, mostly for the benefit of the workers in the producing countries. Just remember the Rupp Reports about the devastating events going on in Bangladesh. It seems that the pressure from Main Street is paying off, and things are changing.
Guilty Or Not Guilty?
But how is it in the so important finance industry? We all remember very well the financial crisis from 2008. Five years later, in a process for investigation of fraud around the U.S. financial crisis of 2007, a court in Manhattan has spoken, and an ex-banker has been found guilty. Former Goldman Sachs trader Fabrice Tourre deliberately misled investors into buying bad mortgages. In 2010, the case led to an extensive discussion about the misconduct on Wall Street. Damaged investors and financial inspectors accused other investment banks of executing similar business practices.
On Wall Street, the sentence was awaited with great suspense. Up to now, these kinds of procedures usually fizzled out. This time, the exchange supervisory authority accused Goldman Sachs and the responsible banker of cheating the customers. The bank had concealed from their customers that the powerful hedge fund Paulson & Co. helped in selecting the mortgages and then bet on the failure of a collateralized debt obligation (CDO) known as Abacus. The amount of the fraud was said to be some US$1 billion.
The process is taking place at a time when the U.S. banks are earning as much as ever, and the U.S. stock market is celebrating new records. It focuses once again the spotlight on the Wall Street machine at a time when toxic assets — in this case, bad mortgages — were bundled into new financial products such as CDOs, and these high-risk papers with initially excellent-yielding "time bombs" were sold to greedy investors. The suspicion is that the responsible people often knew that they were selling scrap. It is conceivable that they made a lot of money with appropriate bets on a calculated crash of their clients.
"Abacus 2007-AC1" has become synonymous for this money machine. These CDOs were designed and sold, among other things offered by the now accused former Goldman Sachs employee. The Securities and Exchange Commission (SEC) suspects indirectly that investors didn't know that Goldman Sachs had possibly created or pushed the collapse of the CDOs from the beginning. Goldman Sachs was able to avert a corresponding lawsuit imposed by the SEC in 2010 with a settlement and a record-high forfeiture of US$550 million. A confession of guilt was never made by Goldman Sachs; however, company spokespersons admitted "some errors." The then-released Tourre, still on the payroll of Goldman Sachs, didn't agree to a settlement with the SEC and therefore urged the inspecting authority to begin a lawsuit.
A New Era Of Transparency?
For the SEC, the process is of the utmost importance. The blame remains on the SEC that the commission, as an important regulator of the financial sector, let the country run into such a crisis. The SEC is also forced into the position of justifying why it brings a relatively low-level Goldman Sachs employee to court and bank managers with more responsibility have nothing to fear from any legal consequences.
However, the days when banks were surrounded by an aura of secrecy and aloofness seem to be over. Even in the 1930s, it was written that it would be dangerous if one has to give reasons for decisions of central banks. Financial experts also wrote that the nature and work of the central banks are a kind of esoteric art, to which only a dedicated elite have access.
In the past two decades, a lot has changed. How decisions are formed is as important as the decisions themselves. Further on, transparency reduces the volatility in the financial markets, which is also important for raw materials such as cotton. Since the central banks have expanded their areas of operations in times of the financial and economic crisis and expanded their risks, the need for explanations is even more evident. This situation has triggered a new avalanche of targets, data, methods and decision publications, just to name a few. But this is still not enough. And as this example shows, a few people in the global financial network can plunge the entire world into misery.
Will this case cause any problems for Goldman Sachs? Not really! The bank had become a synonym for ruthlessness and greed in the financial industry during the financial crisis. Moreover, it didn't hurt the business of the world's largest investment bank. In the second quarter of 2013, the profit doubled to US$1.86 billion. Also the revenues, compared to the previous year, increased by 30 percent to US$8.61 billion.
The accused Tourre does not have much to lose in the event of a conviction. The legal expenses, for example, are paid by his former employer, Goldman Sachs. A surprise? Not really. The court's decision represents one of the greatest victories for the SEC, which had triggered the civil proceedings. Although many banks had to take responsibility for their behavior during the financial crisis, however, hardly any bankers from the top management had to take personal responsibility. The future will tell whether transparency becomes common sense or whether the bankers "forget" who saved their business. But who is controlling whom on Wall Street? At the moment, it doesn't seems to be going the same way as the textile industry. A surprise? Not really.
August 6, 2013