Chapter three of John Kenneth Galbraith's classic book, The Great Crash, about the financial crisis of 1929, is entitled “In Goldman, Sachs We Trust”. The chapter's climax is the startling account of a leveraged investment trust called the Goldman Sachs Trading Corporation, that era's version of a massive collateralised debt obligation. Goldman Sachs had been a trusted household name for decades when a 1932 congressional investigation dragged this complex fund through the mud.
Today, prosecutors and politicians are echoing this Goldman scandal by suing the bank and grilling its managers about their role in a subprime mortgage deal called Abacus 2007-AC1. Their efforts have persuaded three-quarters of Americans to believe that Goldman probably committed fraud. But government officials are mistakenly painting today's bank with yesterday's brush.
I have been an outspoken critic of Wall Street, on these pages and elsewhere, for more than a decade. I continue to criticise banks, including Goldman, for their role in selling subprime mortgage deals. But I am troubled by government officials' relentless focus on Goldman. They are firing at the wrong bank, with the wrong bullets. Goldman is not to blame for this financial crisis.