Goldman Sachs Gets A "Good Smack"

That’s what mothers used to say—as in, “You need a … .” So now it’s Goldman Sachs turn to take one. Whether it will ever come to more than that, whether anyone will ever succeed in proving that this was the naughty kid who started the mess-- or not-- is yet to be seen.
After all this is an election year. There are a lot of peevish folk out there who lost chunks of retirement funds and other investments. There are a passel of poor souls who blame their unemployed status on the financial collapse of 2008. You have to be able to say, “Look, this was all done to you by wicked people, and we are punishing them.”
The Securities and Exchange Commission (SEC) has brought a lawsuit against Goldman Sachs, a hither-to untouched sacred cow of Wall Street. It made tons and tons of money last year and paid tons of money to the employees who took the wild risks and made the company’s profits.
“Some of those risks were too risky for the investor and not risky enough for Goldman Sachs,” the SEC is suggesting. When you sell somebody else a really risky investment—and then bet it will fail, thus betting against your own trusting customers, that can be fraud. So says the SEC.
Those were the “derivatives” that Goldman Sachs and several other major firms spent the last several years selling—to pension funds, foreign banks, each other, mutual funds and private investors. Everybody took a bath—except Goldman Sachs.
Congress voted to allow unregulated derivative trading ten years ago—and the market has grown to over 600 trillion of those little items scattered all over the place, all unregulated. They were a big part of the collapse a year ago last fall.
Of course, a having a lawsuit filed against you doesn’t mean you’re going to lose a lot (other than very major legal fees, which Goldman Sachs can probably afford—but it will put a dent in profits). But, up until now, derivatives have been left totally alone. Congress hasn’t even been willing to talk about regulating them. There has been no legal action or threat thereof. Until now.
So the SEC, which largely sat on its hands as speculations and deceptive financial instruments went wildly out of control over the past few years has finally taken action. I asked myself what this reminded me of—and came up with the following allegory.
A man robs a bank. He shoots someone. The police (government, SEC, Congress, White House) comes in to investigate. They find the bank tellers at fault for having too much money on hand—and thus tempting the robber. They say nothing to the shooter.
They find the bank guard at fault because he allowed himself to be hit over the head and disarmed. They find the bank’s customers at fault because they deposited so much money in that bank. The shot person is at fault because he visited the bank at the wrong hour.
Oh, and there was blame for the bank manager. If he had just had procedures in place to hand the money to the robber without fuss, no one would have been hurt. But no one says anything to or about the shooter. He goes free—to invest the money he got and make himself an ever larger fortune. After all, he was just being a good capitalist.
And now they are actually going to sue the shooter. Of course there is a great hue and cry among his fellow bank robbers—I mean other Wall Street investment bankers—that business will be greatly impaired if the shooter is penalized in any way, and this way of raising capital is curtailed.
I don’t know how it will all play out. A judge could throw the case out; Congress could make an unpredictable move; the White House could offer to mediate in such a way the keeps Goldman Sachs safe from all harm; juries in cases like this can be about as predictable as the path of a tornado—our national history is replete with such eventualities.
But, for the moment, some guys who caused a lot of misery with their recklessness—and, very possibly, chicanery—are having a bad evening. However briefly it lasts, that at least is some satisfaction for the folks who trusted Goldman Sachs—and its ilk—to have their backs.