Question

It is said of Gary Cohn, former chair of Goldman Sachs and advisor to the Trump presidency, that while “[p]inning blame for the world’s financial crisis of 2008 on one man or one bank would not be fair, . . . Gary Cohn and his entourage at Goldman Sachs is a good place to start.” At Goldman Sachs, Cohn aggressively promoted subprime mortgages and other dubious financial instruments. Knowing that these financial instruments were likely to fail, he and his cronies walked away with hundreds of millions of dollars in bonus money and stock options. His behavior cost his company billions and the world economy trillions of dollars in value, and earned him a place in Donald Trump's inner circle.

Of course, Cohn was only one of many crooks to walk away rich from the financial crisis of 2008.

1. Why was Cohn able to operate his fraud for so long? Why did people continue to trust him with their money right up until his frauds were exposed?

2. What happens to financial markets where insiders get a reputation for corruption? Will people continue to invest?

Answer 1

1. Cohn was able to operate his fraud for so long, because all his actions were under the banner of Goldman Sachs, as a reputed brand. His close proximity to political circles was also another factor.

No one could have imagined that a firm like Goldman Sachs, with a reputed history of managing funds, would be so highly exposed to subprime mortgages and other such fraudulent schemes. People never questioned the actions of Cohn, until the scam actually became too big. This is why people continued to trust him with their money, right up until his frauds were exposed.

2. In financial markets where insiders get a reputation for corruption, many institutions may start getting affected subsequently. There will be fear and panic among people, and they start pulling out their funds from such markets. Large scale selling takes place, and more institutions fail. The whole bubble of debt suddenly explodes, and it leads to losses of billions of dollars.

People will not continue to invest in such markets, and they start looking at other alternatives. This may mean other countries, or other assets like gold.