Perhaps we all owe Goldman Sachs an apology. Everyone heaped outrage and ridicule the April spectacle of its executives going before the U.S. Senate and asserting under oath that they saw nothing at all unethical about intentionally selling “crappy” investment products to their trusting customers, then making money for their own firm by betting that the products would fail. Many were reminded of the tobacco executives, in the famous AP photo, all raising their hands to swear that they did not believe nicotine was addictive. After all, Goldman Sachs’s own website pledged openness, honesty, trustworthiness and integrity, saying,

“A critical part of running the marathon is acting consistently and playing a fair and honest game. ‘There’s only one thing we sell, and that’s trust.’ This applies to anything, but nowhere more than Investment Management. Clients trust us to do the right thing, and particularly when you’re in investment management and you’re appointed to manage clients’ money, they trust that you’re going to do it in a prudent manner. The worst thing you could do is breach that trust. We look for people who want to run the marathon, and who understand that trust fuels it.”

Now it seems that we were lacking a crucial document: the firm’s internal Code of Ethics, which Goldman Sachs recently made public. Under the provisions of this remarkable Code, what Goldman Sachs did to its clients wasn’t unethical at all; deceptive, conflicted, and unfair, yes…but not unethical, in the sense that it didn’t violate the Ethics Code itself. “Impossible!” you say? Ah, you underestimate the firm’s cleverness.

It is true that the Code includes many provisions that would seem to prohibit intentionally allowing the firm’s clients to make rotten investments. This one, for example, under  “C. Fair Dealing”:

“We have a history of succeeding through honest business competition. We do not seek competitive advantages through illegal or unethical business practices. Each employee and director should endeavor to deal fairly with the firm’s clients, service providers, suppliers, competitors and employees. No employee or director should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any unfair dealing practice.”

Seems pretty clear, right? One has to read all the way to the end, in the final section, to find what Goldman Sachs relied upon to relieve its conscience, and allowed its executives to keep telling the Senators that they “did nothing wrong.” Here is the last section of the Code:

SECTION III
Waivers of This Code

From time to time, the firm may waive certain provisions of this Code. Any employee or director who believes that a waiver may be called for should discuss the matter with an Appropriate Ethics Contact. Waivers for executive officers (including Senior Financial Officers) or directors of the firm may be made only by the Board of Directors or a committee of the Board...

Brilliant! Any time conduct prohibited by the Code of Ethics is inconvenient, as in “it stops us from making more money,” Goldman Sachs can “waive” it. This means, in their eyes, that activities like deceiving clients, operating with significant conflicts of interest, and breaches of confidentiality are generally unethical and prohibited by their Code of Ethics, but since the same Code lays out a procedure to temporarily “waive” any of these provisions “from time to time,” the firm can lie to clients and undermine the interests of investors for the firm’s own profit without violating its ethics code. Applying a strict compliance standard, as most businesses do, Goldman Sachs can do almost anything (“from time to time”) without technically violating its Code—unless it does so without getting those ethics “waivers”. Now that would be, in the culture of Goldman Sachs, unethical.

Here’s the problem: in every other Code of Ethics, and under the accepted principles of professional ethics, it is the client that must give an informed waiver, not the firm. The reason for this is that conflicts of interest, for example, undermine a firm’s ability to give good, independent advice. A firm with a conflict has an ethical obligation to tell its client about it, because the client trusts the firm to do so. A waiver by the client announces that the client trusts the firm to still put the client’s interests first despite the conflict.  What does a unilateral waiver of an ethical requirement by the firm mean? It means that the requirement of ethical conduct is an obstacle to some firm objective, so the firm simply removes the requirement until the objective is achieved. It’s all completely ethical, of course, because the Code of Ethics says so.

Significantly, nothing in the Code requires Goldman Sachs to inform a client that it has waived ethical principles in relation to the client’s business. If it did, I guess, Goldman Sachs could waive that too.

We’ve seen this creative approach before, mostly from the government. The Bush Administration, for example, unilaterally “waived” its compliance with international treaties and U.S. laws banning torture. The Obama Administration installed tough conflicts of interest rules banning lobbyists from high-ranking administration positions in the lobbyist’s field, and has “waived” its own bans every time there was a lobbyist it wanted to appoint. Maybe this is where Goldman Sachs got the idea. One can get all sorts of inspiration for unethical conduct from our government. A Code of Ethics that permits a company to waive its own ethics rules is not a Code of Ethics at all, but a prop and a sham. Maybe the executives really believed what they told the Senate, that since they had complied with the Goldman Sachs Code, they were “ethical.”

All this proves is that the culture at Goldman Sachs is so thoroughly, hopelessly unethical that it can’t be trusted to write its own ethics code.