Going after Goldman Sachs

On April 16, the U.S. Securities and Exchange Commission (SEC) filed a civil suit against the world-renowned investment bank Goldman Sachs, alleging fraud; if intentional fraud emerges, the case could be sent to criminal prosecutors. This is the first time the regulator has taken action against a Wall Street institution for capitalising on the collapse of the U.S. housing market, which triggered the global economic crisis in 2008. Specifically, the SEC accuses Goldman Sachs of failing to tell customers that investments offered by the bank were supported by very risky mortgages in an already overpriced U.S. housing market. Its officials also contend that the investor John Paulson had influenced the bank's selection of these investments because he knew they were bad risks, and that the bank had failed to tell customers of this. Mr. Paulson, who is not being sued, made billions of dollars himself by betting that the loans in question would fail. Meanwhile, Goldman Sachs is alleged to have profited from bets on those loans and marketed the same packages aggressively. The entities that bought into the scheme, named Abacus 2007-AC1, were mainly foreign banks and pension funds; they lost about a billion dollars.

By current Wall Street standards, the sums involved are small. The SEC will also have to prove their case in the courts against what will surely be a fierce defence. The repercussions, however, are very extensive. The regulators may now investigate the packages other Wall Street institutions are offering. Public money is involved too. The American International Group, AIG, insured Goldman Sachs over some of the Abacus deals, and received a $180 billion taxpayer bailout when the investments crashed. Moral questions will arise over the fact that Mr. Paulson, and possibly the banks involved, saw nothing wrong in selling financial packages which they knew were unsafe and against which they and others could then bet. Furthermore, in 2000, the U.S. Congress eliminated, with the Commodities Futures Modernization Act, key protections against the kinds of things alleged in the Goldman case. Some liken this to allowing the unscrupulous to buy fire insurance on other people's houses. There is no doubting the rising public anger against Wall Street, but it is still not certain that Congress will pass stronger regulatory laws. As Nobel laureate Paul Krugman points out, many Republican members of Congress claim to be against taxpayer bailouts, but are actually colluding with Wall Street lobbyists to block regulation that would prevent future collapses.