The further to the left or the right you move, the more your lens on life distorts.

Saturday, April 17, 2010


The collapse of financial markets in 2008 was caused by many factors, but high on the list was the irresponsible behavior of Wall Street masters of the universe. Among the leaders of these Wall Street geniuses was Goldman Sachs.

In the 18 months since the economic meltdown, it has been astonishing that the federal government has not moved against any of the Wall Street elite. That changed this week when the Securities and Exchange Commission charged Goldman Sachs with civil fraud. It's about time. My only criticism of the SEC action is that the charges brought were not directed at individual senior managers of Goldman Sachs and that those charges were civil as opposed to criminal. However, it's a start.

The editorial page of The New York Times gets this one exactly right when it states:
Goldman insists that what it was doing was prudent risk management. In a letter published in its annual report, it argued that “although Goldman Sachs held various positions in residential mortgage-related products in 2007, our short positions were not a ‘bet against our clients.’ ” The bank also insists that the investors who bought the structured vehicles were sophisticated professionals who knew what they were doing.

The S.E.C. is now charging just the opposite.

It accuses Goldman of intentionally designing a financial product that would have a high chance of falling in value, at the request of a client, and lying about it to the customers who bought it. It says that Goldman allowed that client — John Paulson, a hedge fund manager — to pick bonds he wanted to bet against, and then packaged those bonds into a new investment.

Goldman then sold this investment to its clients, telling them the bonds were chosen by an independent manager, and omitted that Mr. Paulson was on the other side of the trade, shorting it, in the industry vernacular.

Five months after Goldman sold the investments, 83 percent of the bonds contained in the packaged securities were downgraded by rating agencies.

This is a case worth watching. The question now is how vigorously it will be pursued by the SEC and whether Goldman’s significant contributions to power players in Washington (including Pres. Obama) will ultimately have any impact on the direction of the case. It's also worth watching whether the SEC and/or the Justice Department will bring similar charges against other investment banks that did exactly the same thing that Goldman did.

At the time of the collapse, I noted in this blog that the level of irresponsible behavior on Wall Street demanded heavy regulation and, where necessary, criminal prosecution. The Obama administration has moved far too slowly in implementing regulation, and until this week, hasn't moved at all in any judicial proceedings. We can only hope that this will change over the coming months.

The only way to dissuade Wall Street masters of the universe from doing similar things in the future is to put the most egregious violators in jail. That will not be easy because they’ll wrap themselves in plausible deniability. But that doesn't mean that the government should walk away from its responsibility to protect the tens of millions of investors who were significantly harmed by companies like Goldman — the only parties that in this debacle were "too big to fail." It would be quite satisfying to see them punished, but if past history serves, they will receive nothing more than a slap on the wrist and continue with business as usual. Too bad.