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According to the Collins English Dictionary 10th Edition fraud can be defined as: "deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage".[1] In the broadest sense, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation. Defrauding people or entities of money or valuables is a common purpose of fraud, but there have also been fraudulent "discoveries", e.g. in science, to gain prestige rather than immediate monetary gain
*As defined in Wikipedia

Saturday, December 25, 2010

Self-Regulation and Goldman Sachs

According to a couple of articles, in Bloomberg and Reuters, Goldman Sachs is trying to bolster its financial reputation by creating self-regulatory guidelines which are supposed to be more transparent. These rules include:

1. offering to penalize those employees who take risks, or neglect to report risk being taken, by clawing back their bonuses;
2. making bonus payments dependent on more than revenue earned;
3. not paying bonuses in times of financial stress.

The public at large sees the astronomical pay that Goldman Sachs executives and employees get, especially during a recession that GS helped to bring about, as grossly opportunistic. So now Goldman Sachs is going to makes its own rules, but isn't that what GS has been doing all along? Weren't the derivatives that they created and sold done without transparency and according to its own shadow banking rules?

If an employee takes a big risk and earns the company billions of dollars by doing so, do you really think GS will claw back that employee's bonus? How would we even know if the bonus was clawed back then the amount and type of bonus is decided by GS and not the shareholders or an outside regulatory organization?

As for bonuses not paid in times of financial stress: Does Goldman Sachs not believe that it should run its banking business by avoiding financial stress? Are they looking forward to more financial stress? Shouldn't banks who create financial stress be closed down in an orderly fashion as the FDIC does with smaller banks?

When Goldman Sachs creates its own Business and Standards Committee with its own rules, how can we be sure what these standards really mean and when they will be put into effect. When the rules are inconvenient, they can be overruled or negated. So much for self-regulation.

Self-regulation on Wall Street is a farce.


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