SEC Hits Goldman: Good for the Little Guy?

Last Updated Apr 16, 2010 3:58 PM EDT

The SEC accused Goldman Sachs of fraud, the stock market took a dive, and President Obama holed up with economists at the White House, crafting a tough new financial regulation bill. You can still take the weekend off.

If you didn't wake up this morning and sell your bank stocks before breakfast, you might as well sit tight and wait for the dust to settle. Analysts have taken to the airwaves to say the sell-off of Goldman -- and other banks not even involved in this complaint -- was overblown.

In the long run, it could be good news for investors and consumers, says New York financial advisor Gary Schatsky. "The increased SEC scrutiny, coupled with the timing of the financial deregulation bill in Washington, could improve confidence in financial markets and reduce the likelihood that this kind of thing would happen again."

But, of course, first we have to get through the short term -- in which we watch our stock prices plunge and worry about whether there's anyone out there to trust. The SEC said that Goldman -- let's use less formal language than the agency did -- stuffed a bunch of crappy securities into packages it was selling investors. Moreover, the complaint alleges that Goldman allowed hedge fund client Paulson & Co to help choose the securities and then bet against them. Geez! That should make one thing clear to individual investors: When you read about these Wall Street wizards making millions, it's not because they have a better sense of timing than you do. It's because, more often than not, they are shooting fish in a barrel.

What else can you take away from this frantic Friday? Here are a few pointers.

Your cynicism will be rewarded. This whole mess dates back to the subprime mortgages that were being handed out like Halloween candy in the mid-2000s, re-packaged, traded, and sold to whomever would ultimately buy 'em by the bag, without looking into the bag very closely. Here's an old chestnut, but it bears repeating: If you don't understand something, don't invest in it. If something (a loan, a new fund, a money-making deal) doesn't make sense to you, it's not because you're not smart enough. It's because you are smart enough, so just say no.

It's not a clear buy or sell sign now. The market went up a lot in the last week, then it gave a bunch back today, so some of the sell-off was probably going to happen on any news peg. Some companies will have fallout from the SEC's suit against Goldman. For example, it's actually considered bullish for MBIA, the bond insurer that might be in a position to recover some losses if they stemmed from Goldman fraud. It was at least temporarily bearish for most other finance and banking stocks, but that may not last. Continue to invest as you already would, based on your long-term objectives. If you were thinking about buying bank stocks, they're priced better today than they were yesterday.

Watch Washington now. Democrats already had a lot of wind at their packs to pass a comprehensive financial reform bill; this probably helps their cause. The bill goes to the Senate floor next week. Most of the attention has been focused on whether or not the bill creates a new consumer protection agency, but here's another section to watch: Some versions of the legislation require banks to keep for themselves 5 percent of whatever securities they creatively package and sell off. So they would have some skin in the game, just like the rest of us.

Photo by Americans for Financial Reform at Flickr
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