The Goldman Sachs SEC Investigation Is A Joke


On Friday, when the Goldman Sachs SEC investigation press release went out, I was working in a Starbucks in a small town. There was a rather normal-looking man, and he was whisper-screaming on his cellphone about Goldman Sachs. I could hear phrases popping out, like “finally going to get them” and “those bastards” and the like. He had lost his mind, and the New York Times quickly followed. The Goldman Sachs SEC investigation-which is the sadsack SEC’s unconvincing look at a minor bit of potential malfeasance in a single unit of the company in its transactions with other banks, with a potential fine equal to an extremely small percentage of Goldman’s daily income-has been forcibly evolved by the media into a bizarre and misunderstood scandal. The SEC investigation made the front page, above the fold, of the New York Times both Sunday and today; Sunday’s story was the most ludicrous.

Line by line, the Sunday Times story is composed of hot air and baloney. (Today’s is more informative, at least, if largely speculative.)

The lawsuit “seemed to confirm many Americans’ worst suspicions about Wall Street,” they wrote, which is true, if you consider that the sentence hinged on “seemed,” as no American understands the complaint. (It is only fair to note that I have read it several times now, and spent a lot of the weekend discussing it with people smarter than myself and still I probably do not understand all of it either.) Much of what follows in the Times piece is speculation on the idea of there being possible future lawsuits by other bank-customers of Goldman, and on the growing political machinations for regulation in a completely unregulated market. (Which, great! Looking forward to that.) The SEC lawsuit “raises new questions”! (Questions not really new or raised.) The stakes “couldn’t be higher”! (Oh but they could.) Goldman’s success is “controversial”!

The success is not, particularly, controversial. It is if you are playing perception politics.

And this piece of financial analysis is entirely coverage of perception. It is similar to the current role of the Times in covering actual politics; the paper reports on policies and initiatives by political leaders but renders their decisions in terms of quests for “political capital,” that terrible meaningless and misused phrase so beloved of the Bushes, or in terms of the reaction of the “political audience.” This is a very mistaken position regarding the importance of the public-and a cynical one, too, as it chalks up all actions by politicians or bankers to a wish to court the public, instead of, you know, a wish to actually do something.

The perception is stuck now; and in the intersection of politics and finance, it can safely be described as “a toxic political cloud”-even if nothing ever comes of it, which it most likely will not.

It does not in fact matter too much what the public thinks of Goldman Sachs! If they had a public opinion poll on how the average uninformed American “feels” about the bank, people would report that they feel quite bad about the bank, and that is not liable to change at any time. There are many reasons to dislike Goldman Sachs, of course. Few of them are as elaborate, specific and confusing as this case.

What’s even worse about these stories is the confusion about who is an “investor.” That word gets bandied about quite a bit, and never, in this case, does it mean “people who buy stocks” or “people who are not members of billion-dollar commercial entities.” The game? It “is rigged, the odds stacked in the banks’ favor.” But, but… the game is entirely composed of banks. The game is always in “the banks’ favor.” There are no non-banks involved!

“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 poor uninformed investor! Main Street! Who was the investor so taken advantage of in the SEC charge? IKB Deutsche Industriebank AG-an immense bank, with nearly 2000 employees, that so wholeheartedly bought in to the subprime fad that it had to be bailed out twice.

A look back at Louise Story’s largely excellent work at the Times on the Merrill Lynch-Bank of America craziness showed that that major financial story-which provided real insight into the relationship of the government and the banking system-rarely, if ever, broke out in the paper beyond the front page of the business section (except at least, once-when bonuses were involved). And also “S.E.C. CONCEDES OVERSIGHT FLAWS FUELED COLLAPSE” made it to the front page back in September 27, 2008, which is slightly another kettle of fish but not at all unrelated to the SEC’s rather dismal little investigation into Goldman Sachs now.

The actual complaint is unshocking. Our German friends told Goldman Sachs that they weren’t interested in purchasing CDOs that didn’t have a trusted collateral manager; GS hired and negotiated with a trusted collateral manager to create the CDO packages that they then sold to the bank. That there was another party involved helping pick the package that was chosen by the Germans doesn’t seem all that shocking-even while that other party “bet against” the package. (A legal act, mind you.)

The Merrill-B of A story was a real story about how the financial crisis went down. This story, on the other hand, may be the beginning of a long series of confusing, irritating lawsuits-although we’ll see how many there are, in light of the fact that Goldman is likely to win this one without even really trying too hard.