Goldman Sachs Group Inc. slammed the door on U.S. clients hoping to invest in a private offering of shares in Facebook Inc., because it said the intense media spotlight left the deal in danger of violating U.S. securities laws.On the surface, this looks like doublespeak of a very high order. The US is a rule based legal system, which means a violation of securities laws is a violation of securities laws, or more precisely, a violation of law can be determined by mapping a fact set against statutes, regulation, and case law. So the idea that legality has anything to do with media coverage is spurious.
But perversely, Goldman’s truthiness is an accurate account of the real state of affairs. Goldman sees that securities regs operate in the world of Schrodinger’s cat, where legality is in an indeterminate state until someone takes the trouble to look. And that remains true of what happened during much of the crisis. Tom Adams and I have written long form of the abuses that took place in CDOs, including probable market manipulation, lack of arm’s length pricing, and collusion by CDO managers, and we have argued separately that CDOs were the driver of the toxic phase of the subprime bubble. But no one seems willing to go there because the forensic work looks to be too daunting.
So the corollary of the Goldman uncertainty principle is: make anything so complicated that mere mortals are deterred from understanding a product or a business practice, and no one will open the box wide enough to see whether it is legal or not.