SEC finally lights fire under Goldman smoke

April 16, 2010

The Securities and Exchange Commission has lit a fire under all the smoke billowing around Goldman Sachs. The bank has become the popular totem for public anger over Wall Street greed. But so far Goldman has been embroiled in little more than a war of words. Now the SEC has accused Goldman and one of its employees of securities fraud related to how they structured and sold a synthetic collateralized debt obligation backed by subprime mortgages in 2007. The stakes couldn’t be higher.
After all, despite all the smoke about Goldman’s conflicts of interest, clients have hardly run from the building. The firm still sits atop, or near it, in many investment banking and stock sales businesses. And in 2009 it traded with 6,000 customers, a third more than three years before. That helped the firm make a whopping $13.4 billion last year.

It’s unlikely all those clients consider Goldman to be a paragon of virtue. Many probably even scoffed a bit at Chief Executive Lloyd Blankfein’s insistence in last week’s letter to shareholders that the firm only acts in the interests of its customers.

But the SEC allegations, which Goldman disputes, lay out a scenario customers may have feared: Some clients are more important to Goldman than others, and those without the requisite status can be burned. The regulator also dragged in the most famous beneficiary of the mortgage meltdown, Paulson & Co. The hedge fund made $1 billion shorting the trade the SEC outlines, the same amount lost by investors who bought the bonds. Paulson isn’t charged with anything — but the case revolves around allegations that Goldman misrepresented the role Paulson played, and obscured it from investors.

The SEC’s flimsy reputation may be at stake over the case, but Goldman’s even more so. The charges alone spooked investors, who wiped out more than $10 billion of the bank’s equity on Friday morning. They could scare off some clients too. Some European authorities shunned working with Citigroup after its “Dr Evil” trade in government securities came to light in 2004. And Orange County, California, swore off working with Merrill Lynch — even years after the bank settled charges it sold the region’s treasurer too-risky investments.

Goldman may eventually be exonerated. But containing the fire lit by the SEC will be an exhausting endeavor. The bank will be hoping any damage can be contained to the offending product — which of course smoldered long ago.

Comments

The SEC didn’t light the fire, but pinpointed one of its locations. The arsonists and their accomplices are still at large, blowing even more smoke in the face of would-be honest investors, but not for much longer.

If I were you, I wouldn’t take a bet on exoneration anytime soon.

Posted by HBC | Report as abusive
 

The banking and investment industry have congress and the senate by the short hairs, if not in direct collusion. GS will eventually find a sacrificial lamb to burn and then it’s business as usual.

Posted by getsthegrease | Report as abusive
 

Exoneration? Don’t bet against Goldman. That firm more than any other enjoyed a very privileged position throughout the crisis in both regulatory matters and in the distribution of bailout money. Their ability to manipulate the wheels of government and regulators for their own benefit is significant, sad to say.

The financial world would certainly be better off without synthetic financial products. If an investor owns an underlying bond and wants a CDS to go with it that’s one thing, but managers buying these instruments without the underlying asset are just gambling, and doing so with much greater influence on the price of the affected asset than the asset and issuer itself.

Posted by PapaDisco | Report as abusive
 

Is it wise to go after the one on top when today’s news just reported eight more banks were taken over by the Fed? -> With the peek of this trend not likely until third quarter of this year?
There’s alot of renewed confidence very early for this in actuality, tight rope act of balancing.

Posted by avgprsn | Report as abusive
 

……… “one” of its employees?? Come on, you think one guy dreamed up this massive international fraud?? Its about time the SEC moved against the people who have hurt countries all over the world while pocketed massive profits overnight. Without investigation and prosecution the SEC and indeed the USA itself has no credibility.

Posted by JJWest | Report as abusive
 

I know someone who is not going to getting a lot of sleep this weekend…

Tim Geithner?

Wink, wink, nudge nudge, say no more!

Posted by TFD | Report as abusive
 

This should be fun. I suspect the timing, and the narrow focus, but the message is unmistakable. Any banking industry lobbyist is going to have to do some explaining first, any data they cite will be suspect. The Obamists are learning, they aren’t giving the (R)s room on the populist side of the issue. Teabaggers are going to have to oppose government regulation in the face of criminal evidence.

The Feds have deep resources, and lots of time. If they refuse to let Goldman settle, they will create a boilerplate template for class action cases complete with supporting evidence for the owners of those $1 Billion Paulson related losses.

Posted by ARJTurgot | Report as abusive
 

notice how the business media is more upset than GS about the charges.

Posted by neonderthal | Report as abusive
 

We cannot allow GS to skate by on a Congressional scolding and a class action civil suit.

If crimes were committed in the process of bringing down the largest economy in the world, then the punishment should fit the immensity of the crime.

Considering the harm wrought upon America by the parties taking wild profits with NINA loans, derivatives, CDO’s, credit default swaps, etc., I believe that the judicial branch of government should look into Treason charges.

Posted by breezinthru | Report as abusive
 

From reports on NPR, I believe that a civil action is the place that opens the door to multiple criminal prosecutions. To achieve beyond a reasonable doubt, one must gain through discovery the preponderance of the evidence.

Posted by rdberg1957 | Report as abusive
 

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