What a difference an indictment makes. Only back in February, President Obama called Goldman Sachs CEO Lloyd Blankfein a “savvy businessman” and said he didn’t begrudge the financier his $9m bonus. Yesterday, a bipartisan senate committee joined together to beat up on the man. It seems the SEC civil suit against Goldman has become a real game changer. A few weeks ago, the chances for financial reform seemed paltry. Today, even Republican senators are turning against Wall Street. While they still maintain their opposition to the Dodd bill, they clearly fear being painted as the bankers’ lackeys. Senior New York Senator Chuck Schumer, long known as Wall Street’s man in Washington, is keeping quiet. Even he says he supports financial reform. Although the inter-party squabbling continues, it seems a real reform bill now has a decent chance of being made law.
The White House and the SEC claim the indictment on 16th April wasn’t politically motivated. Don’t believe it. First, all the Republicans on the SEC panel voted to quash it, while all the Democrats voted to go ahead. Second, the timing was impeccable. Third and most important, this case was brilliantly chosen to expose dubious financial practices in ways most of us can understand. By choosing to indict Goldman Sachs, the government picked the biggest bully in the playground and slapped him around. Goldman lost over $14bn in market capitalisation the day the suit was made public. Its reputation may take years to recover.
Here is the story, according to the SEC. In 2007 hedge fund billionaire John Paulson wanted to bet against subprime mortgages. He asked Goldman to help him create a collateralised debt obligation (CDO) he could then short. For a mere $15m fee, Goldman happily set up the CDO and then allowed Paulson to cherry pick mortgage pools he was confident would fail, and fail fast. In other words, the casino allowed one of the players to shuffle the deck in order to deal himself a straight flush.
Shockingly, this in and of itself is not illegal, nor does Goldman deny doing it. Its crime, according to the SEC, was not informing the counter parties that Paulson was stacking the deck. Goldman’s defence is that on the other side of the trade…