A multi-billion dollar hair cut.
Goldman Sachs lost nearly 13% of its market valuation Friday after the Securities and Exchange Commission filed a fraud complaint against the most powerful and best-managed company on Wall Street. Now, the question is whether it's also one of the most corrupt.
It all depends on whether the government can prove its blockbuster charges. The complaint essentially accuses Goldman of misleading investors in 2007, when its salesmen marketed a new investment product but allegedly failed to disclose that a hedge fund with an interest in shorting was involved in selecting the contents. If that's not a big no-no, it qualifies as bad form.. (Snooze alert: At this point, you can add "synthetic collateralized debt obligation" to the glossary of terms that nobody has the foggiest idea about.)
In its two-page rebuttal, Goldman rejected all of the allegations laid out in the SEC complaint.
For the Obama administration, which wants Congress to tighten curbs on big banks, the lawsuit couldn't have come at a better time. The public's already disgusted with Wall Street and the SEC charges only deepen the perception that the plutocrats have rigged the game in their favor. At the same time, the filing creates a delicate political moment for the GOP. Senate Republicans, who have pledged to oppose the so-called Dodd bill, don't want to be seen as carrying water for the financial industry, Not in this climate. Yet, hey don't want to hand the White House another big legislative victory, especially on the heels of losing the legislative battle over health care reform.
But let's return to the political context for another day. The allegation that Goldman was playing a crooked game is a huge story. Here's Robert Khuzami, Director of the SEC's Division of Enforcement:
"Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party," he said.
The SEC claims that Goldman duped investors into believing that the CDOs were a good money-making proposition and that the people managing them also believed that. In other words, as Reuters' Felix Salmon put it, the venture "was being structured by the biggest short-seller in the entire sub prime market."
The rest of the details are in the report and they make for a fascinating read. But there's a bigger context to the charges. This is one of those seminal points in American history that they teach you about. If found guilty, Goldman will lose more than the fine it will pay. Writing in Rolling Stone a few months ago, Matt Taibbi famously described Goldman as a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.
Goldman and the defenders of the financial establishment bristled at that description. They said it was an exaggeration and entirely unfair. Up to a point. The 4th Estate has a propensity for over-simplifying complicated situations - not to mention taking the occasional cheap shot. But what if the vampire squid portrayal turns out to be true? And a crooked vampire squid, at that. Plus, if one domino falls, you know that others surely will follow. If Goldman was conning investors how many other banks were up to the same thing?
We have to reserve judgment until the facts are all in. This much, though is clear: Nothing less than the honor and integrity of the U.S. financial system is going to be at stake.