Issue of the week: The SEC vs Goldman Sachs

The action against Wall Street's sharpest bank has given fresh impetus to financial reform, but do the charges stack up?



Goldman Sachs chief, Lloyd Blankfein, once admitted to spending sleepless nights pondering the impact of unforeseen events. The Securities & Exchange Commission's interest in the bank's Abacus CDO was nothing new, said Andrew Leonard on Salon.com: the US markets watchdog first noted "potential improprieties" relating to it in August 2008, and Goldman responded in depth. But what stunned the bank's top brass was the SEC's decision to launch legal proceedings without first trying to reach a settlement. It was the right thing to do. It may be years before we get a judgement on this case, but the threat of a "wrathful" SEC will at least have the rest of Wall Street "looking over its shoulder".
The fraud charges hinge on the key distinction of whether the investors who lost $ 1 bn buying Fabricc Tourre's exotic package of mortgage securities were "fools or victims", said Hugo Dixon on Breakingvicws.com. The SEC's allegation is that Goldman marketed its "synthetic CDO" without revealing the involvement of John Paulson's hedge fund to investors - notably the German bank 1KB and the Dutch bank ABN Amro (later bought by the Royal Bank of Scotland). Goldman's defence is that everyone in the market knew the portfolio would attract both long and short investors, and that an independent agent, ACA, had the final say
in its content. What's more, Goldman itself took hefty S90m losses because it invested alongside its banker clients. That's probably the biggest stumbling block to the SEC case, said John Gapper in the FT, particularly since there's only "patchy" evidence that investors were "actively misled". One thing's certain: this is no open-and-shut case. The SEC will have its work cut out nailing Goldman.
Maybe, said Alex Brummer in the Daily Mail. But Goldman Sachs "will have a hard time defending itself in the court of public opinion". On too many occasions, the actions of this bank - whose tentacles reach
deep into government and central banking: arQund fhe WQrld _ havc ^ mora|,y
questionable; not least its habit of "stacking the odds in its favour" when dealing with clients. Goldman's platinum-plated reputation has brought it record profits. But it has been "too clever by half". Unless it moves rapidly "to cleanse the taint of dodgy dealing... it will pay a very high price indeed. And there will be many who will say it deserves to." The best outcome from this case, said Paul Krugman in the New York Times, is that it will hasten not just financial reform (much needed though that is), but also a change in attitude. "Much of the financial industry has become a racket - a game in which a handful of people are lavishly paid to mislead and exploit." It's time to put an end to it.