There were reasons for financial reforms.
On the same day that Congress passed sweeping financial-reform legislation in 2010, Goldman Sachs & Co. agreed to pay $550 million to settle fraud charges. The charges accused Goldman of fraud in mortgage investments. That includes $300 million in fines assessed by the Security and Exchange Commission – the largest in SEC history.
The remaining balance of $250 million went to the victims.
You might recall that Goldman’s mortgage-related investments were designed with participation by a Goldman client, Paulson & Co. Paulson bet those investments would not succeed, and they didn’t.
Goldman was forced to assess its procedures in such financial mortgage deals. The catalyst was the investments that cost investors nearly $1 billion, but the deal netted Paulson huge sums of money. It was also part of the mega mortgage meltdown that helped to exacerbate the nation’s economic downturn.
“This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing,” said Robert Khuzami, the SEC’s enforcement director.
The case against Goldman gathered steam when a published report added impetus to fraud allegations against Goldman. The Sacramento Bee alleged Goldman secretly worked to dump “billions of dollars in risky mortgage securities and buy exotic insurance” in anticipation of the housing bubble. But the report said Goldman hid its actions from the Securities and Exchange Commission for nine months in 2007 (“Goldman didn’t disclose its subprime mortgage hedges”).
At issue: Opponents eventually proved that Goldman’s gambling was so relevant – investors would not have bought Goldman’s offerings.
The furor over that controversial 2007 mortgage derivatives deal still underscores the fear of many Americans that the market is rigged against them because Wall Street is a haven for questionable behavior.
The Security and Exchange Commission’s triumph over Goldman’s handling of the collateralized debt obligation (CDO) in subprime mortgages showed the Wall Street sheriff is back and is flexing some muscles.
Furthermore, Goldman’s failure to disclose that a hedge fund manager, John Paulson, helped select the underlying securities and then bet against them to make more than $1 billion is bad enough.
Goldman hid investigation
It’s looked even worse after Bloomberg reported Goldman knew it was under investigation for nine months but failed to disclose the investigation in their financial reports to investors.
Such omissions triggered the shareholder legal action.
The resulting headlines are reminiscent of the financial-greed scandals involving the 1980’s shadowy behavior of convicts Mike Milken and Ivan Boesky, as well as the principals at Enron and Worldcom.
Several questions have arisen:
- Is the SEC action really the tip of the iceberg of upcoming legal challenges?
- Will it lead to a stock market correction?
- Will it end the entitlement attitudes seemingly held by many investment bankers?
- Will it improve the culture in the financial sector?
This case was an ideal situation for New York’s litigious community.
It led to a decline of Goldman shares – 13 percent – as well as the shares of other financial companies trading in CDOs, including Deutsche Bank AG, Morgan Stanley, Bank of America (the parent of Merrill Lynch) and Citigroup.
Widespread conflicts of interest
In addition, a Chicago online publication, ProPublica, reported on questionable bets by Magnetar and allegations of conflicts of interest by the latter three financial firms. Magnetar denied culpability and none of the three banks denied or commented on the allegations.
Indeed, the same day that the SEC acted against Goldman, a Dutch bank leveled similar charges against Merrill Lynch. Cooperatieve Centrale Raiffeisen-Boerenleenbank BA, or Rabobank, cited Merrill Lynch in a $1.5 billion CDO.
Sadly, regarding Wall Street’s entitlement attitudes and culture, the consequences might not be severe enough to prompt an attitude adjustment.
Not to be cynical, here’s the bottom-line question: Are there enough moral compasses on Wall Street to put a stop to the chicanery? Probably not.
From the Coach’s Corner, a few more Wall Street-related articles:
Major Banks Are Too Big to Fail, But Not to Break Them Up — The time has come to break up the big banks. There are 5,000+ banks in the U.S. However, just a dozen of them dominate with 69 percent of the assets in the banking sector.
Federal Reserve Typifies What’s Wrong with Economy — There’s still a troubling schism in U.S. politics, monetary policy and management of the economy. The Federal Reserve keeps printing money, which risks inflation and only encourages more bad monetary policy. For another example, consider Bloomberg ‘s shocking expose: “Wall Street Aristocracy Got $1.2 Trillion in Loans from Fed.” Yes, $1.2 trillion in secrecy.
How Twitter Levels the Playing Field for Small Cap Companies — Good news for venture capitalists and entrepreneurs who are known to kvetch that that their companies fall below the radar screen of Wall Street analysts and the media. It’s widely known that mainstream media coverage seems to favor large companies over small ones. It’s a valid concern.
“The saddest thing I can imagine is to get used to luxury”