(John Chachas) – The SEC’s case against Goldman Sachs is a public relations stunt, rather than a serious attempt at regulatory enforcement. The timing was vintage Chicago politics: make it difficult for any politician to challenge the administration’s version of financial industry reform by demonizing an American icon.
Our government on Friday embarked on a course that destroyed $12 billion of stock market value for Goldman’s employees and shareholders and precipitated a broader market decline of 1.1%. Efforts to agree on financial regulatory reform have gone the way of healthcare: the Obama-way it shall be, or no way at all.
The SEC action is supposedly rooted in a complex transaction fraudulently sold to investors. Goldman constructed a synthetic collateralized debt obligation (CDO) built on sub-prime mortgages at the request of a client. In every security trade, someone bets right and someone is wrong. Here, Paulson & Co. bet correctly the risky mortgages would default and the CDO would decline in value (and how it did!). Paulson used derivatives (CDS) to bet on this outcome and made a boatload of money. Other investors, including a German bank, IKB, and ACA Capital Management bet the opposite way and lost. All are highly sophisticated institutions that had previously done similar transactions and benefited from disclosure and due diligence. No one was hood-winked.
The SEC has charged Goldman with “fraud” even though Goldman itself lost $90 million as the intermediary. The ‘winner’ on the trade, Paulson & Co., who reportedly earned more than $1 billion, has been dragged into the fray. The intent here is to crucify Goldman in the court of public opinion and, further, to insinuate that Paulson couldn’t have possibly made its billion legitimately. It’s the most cynical form of political leverage creation we’ve seen yet by this administration.
Cases such as Enron and WorldCom have proven that the term “fraud” is burnished with intent of theft. It is a difficult charge to prove. We all acknowledge the derivatives marketplace has flaws, but rather than truthfully focus on reform, it makes for better politics for the Obama appointees at the SEC to feed the flames of populist anger. After 18 months of looking at the financial crisis, the above case is the best the SEC could come up with? Find a quote in a personal email written by a 28-year Goldman staffer (“Fabulous Fab”) and trumpet it as the smoking gun of institutional fraud?
The real goal is clear: occupy the press with a feeding frenzy of incomplete sound-bites for weeks as Democrats seek to ram through Chris Dodd’s vision of government oversight of American finance.
The shame is the American financial system continues to need concrete, thoughtful reform. The Credit Default Swaps marketplace is part of the systemic risk that contributed to the financial crisis. But a government take-over of American finance isn’t the answer. Another intrusive government “consumer” agency isn’t needed, either. Rather than working with Republicans to craft a constructive bi-partisan piece of legislation, this has become ugly politics: hide behind the SEC’s headline-making charges and muzzle any opposition. What will be the affects of this charade?
I wager the accusations will be withdrawn and never see trial, but only after they have served a cynical political purpose. Goldman will emerge vindicated but will spend millions to defend its reputation. No fraud will be proven. The case is a canard.
Senator Dodd’s committee will bring forth misguided legislation, including a new Federal consumer protection agency. The tax on banks proposed by Democrats will – like healthcare – be a new punitive cost on American business, including Nevada businesses, and a funding source for a Federal government out of control. It will be passed on to American consumers. Nevada, suffering from decreased credit and one of the worst job markets in the country, is poised to yet again be hardest hit by these overbearing policies.
Congress must strengthen accountability of the SEC, reduce fighting between numerous oversight agencies involved in the finance industry, improve transparency and price-discovery in complex securities and enforce laws and regulatory regimes already in place.
The Obama administration, lacking the interest to institute bi-partisan financial regulatory reform, sought political leverage and publicity and has succeeded at both but at an immediate and future cost to the American people.
Demonizing an American finance icon makes for good politics, but that’s all it is.
(Mr. Chachas is a Republican candidate for the United States Senate in Nevada)