Kōshō

Goldman Sachs is presented as one of the financial institutions whose authority was supposed to help investors distinguish sound businesses from untrustworthy ones, but whose conduct during the late-1990s stock-market bubble instead helped lend credibility to dubious companies. Its example supports the book’s broader argument that institutional safeguards cannot work through reputation and self-interest alone when dereliction of duty brings no penalty.

Role as a Financial Gatekeeper

Wall Street underwriters are described as serving a certifying function: when Goldman Sachs underwrites a company’s stock offering, it signals that the company has real value. The signal matters because investors cannot independently establish every fact about every firm; they rely on intermediaries whose business appears to depend on credibility. In that system, underwriting is not merely a transaction but an assurance on which other participants may act.

The comparison with safety certification clarifies the stakes. Just as consumers might rely on a laboratory mark when choosing electrical equipment, investors may interpret an underwriting as evidence that a company deserves their trust. The system’s promise, however, depends on the certifier being held accountable if that assurance proves misplaced.

The Bubble and the Breakdown of Accountability

During the late-1990s stock-market bubble, Goldman Sachs is named among the prestigious firms that underwrote companies the book calls laughable. Rather than preserving a meaningful distinction between businesses with solid value and those without it, the prestige of such firms helped sustain confidence in a market where the ordinary checks were failing.

The book places this failure within a wider collapse of oversight. Between 1997 and 2000, seven hundred companies were forced to restate their earnings, compared with just three in 1981. Yet institutions involved in bringing companies to market did not pay a price for their lapses; instead, they received more business. Goldman Sachs’s underwriting is thus one part of a pattern in which reputational authority remained valuable to the firms using it even as the market failed to punish unreliable certification.

Significance in the Book’s Argument

The example exposes a weakness in the assumption that self-interest automatically makes financial intermediaries trustworthy. If underwriters, auditors, and exchanges depend on credibility, their incentive should be to identify unreliable companies. But that incentive only disciplines them if clients and investors withdraw business after failures. In the bubble, they did not.

Goldman Sachs’s role therefore illustrates a failure of verification as well as a failure of institutional design: investors continued to trust the signals supplied by market gatekeepers without adequately scrutinizing the companies those gatekeepers endorsed. The episode reinforces the book’s warning that trust can support cooperation, but cannot substitute for accountability and due diligence.