Accusations that Goldman defrauded customers who bought investments tied to risky subprime mortgages have only just begun to reverberate through the financial world.
The civil lawsuit that the Securities and Exchange Commission filed against Goldman on Friday seemed to confirm many Americans’ worst suspicions about Wall Street: that the game is rigged, the odds stacked in the banks’ favor. It is the first big case — but probably not the last, legal experts said — to delve into a Wall Street firm’s role in the mortgage fiasco.
It is a particularly sensitive time for Wall Street. Washington policy makers are hotly debating a sweeping overhaul of the nation’s financial regulations, and the news could embolden those seeking to rein in the banks. President Obama on Saturday stepped up pressure for financial reform by accusing Republicans of “cynical and deceptive” attacks on the measure.
The S.E.C.’s action could also hit Wall Street where it really hurts: the wallet. It could prompt dozens of investor claims against Goldman and other Wall Street titans that devised and sold toxic mortgage investments. On Saturday, several European banks that lost money in the deal said they were reviewing the matter. They could try to recoup the money from Goldman.
And it raises new questions about Goldman, the bank at the center of more concentric circles of economic and political power than any other on Wall Street.Come to think of it, this is somewhat surprising. It had looked like GS and the rest of them were going to get away with all of it. Sure, Matt Taibbi has been shooting holes in GS like an expert marksman, but their influence still dwarfs his.
At least, it did. They are in a fair spot of trouble:
That's it in a nutshell. The SEC's actions may amount to nothing. They will probably amount to nothing. It doesn't matter. This will open the floodgates, and everybody who even suspects that they were taken advantage of will be baying for GS's blood: both in America, and around the world.
On Friday, Goldman’s stock took a beating, falling 13 percent and wiping out more than $10 billion of the company’s market value. It was a possible sign that investors fear that the S.E.C. complaint will damage Goldman’s reputation and its ability to keep its hands on so many sides of a trade — a practice that is immensely profitable for the firm.
It is unclear whether the S.E.C. can prevail against Goldman. The bank has long maintained that it puts its clients first and, in a letter in its latest annual report, it reiterated that position. Goldman said it never “bet against our clients” in its trades but rather was trying to hedge against other trading positions.
The transaction cited in the S.E.C. complaint cost investors just over $1 billion, relatively small by Wall Street standards.
Still, Wall Street analysts said Goldman and other banks, having navigated the financial crisis, might now face a new kind of risk: angry investors. Most major Wall Street banks also created collateralized debt obligations, which are at the heart of the Goldman case. C.D.O.’s, which are essentially bundles of securities backed by mortgages or other debt securities, turned out to be among the most toxic investments ever devised.
“Any investor who bought these C.D.O.’s and lost a significant amount of money is probably looking at their investment and wanting to know: what were the details behind the sale?” said William Tanona, an analyst at Collins Stewart. “Will they contact the S.E.C. and say, ‘Here’s the transaction we participated in, and we’d love to know who is on the other side of it?’ ”
The sweetest piece of this whole thing? They're being treated like gangsters:
This is what you do to drug dealers. You hit a small fish and roll your way up by getting them to cooperate. That they're using the same technique on GS speaks volumes of exactly how trustworthy, how honest, how law-abiding they think that GS isn't.
The S.E.C. complaint named just one Goldman employee: Fabrice Tourre, a vice president in the bank’s mortgage operation who worked on the questionable transaction.
But securities lawyers say Mr. Tourre appears to be a small fish. Federal investigators may try to gain his cooperation and extend their investigation to other Goldman employees. On Friday, Mr. Tourre’s lawyer did not provide a comment on the complaint.
A big question is how far up this might go. The S.E.C. said the deal in its complaint had been approved by a panel at Goldman, the Mortgage Capital Committee.
“It’s typical that they’d start with someone lower down on the chain and try to exert pressure on that person,” said Bradley D. Simon of Simon & Partners, a white-collar defense lawyer in New York. “Is it really conceivable that no one else was involved in this?"
But all of this raises a question: how did the SEC even get the go-ahead to do this in the first place? It's inconceivable that they made this decision in a vacuum. GS alumni and allies are in every branch of the Obama administration. The SEC head had to know that; he had to know that this would need the go-ahead from the administration. He must have got it. But, in a million years, I never would have thought he would have got it.
First bit of good news in a while. First time in ages that I've actually been optimistic about something. It may pass, but it's a nice change, isn't it?