Goldman Sachs: Too Big For Jail?

By: Don McNay
By: Don McNay

The Securities and Exchange Commission is receiving media kudos after filing a lawsuit that accuses Goldman Sachs of fraud. A Los Angeles Times headline trumpeted, "Goldman Sachs case could help Obama shift voter anger." A McClatchy news service headline blares, "Message to Wall Street: SEC is back on the job."

When happily ever after fails
And we've been poisoned by these fairy tails
Lawyers clean up small details
Since daddy had to fly

-Don Henley and Bruce Hornsby

The Securities and Exchange Commission  is receiving media kudos after filing a lawsuit that accuses Goldman Sachs of fraud. A Los Angeles Times headline trumpeted, "Goldman Sachs case could help Obama shift voter anger."  A McClatchy news service headline blares, "Message to Wall Street: SEC is back on the job."

Before I join the chorus of media cheerleaders, I ask the Peggy Lee question, "Is that all there is?"

I'm not a lawyer but my understanding is this, the SEC filed a civil lawsuit.  It's a lawsuit, not a criminal action. No one is going to jail.  No one is going to be dragged off in handcuffs.   

Just because the SEC filed a lawsuit, it doesn't mean they will win. Goldman Sachs could easily prevail. The Wall Street Journal noted how the government might have a difficult time at trial.

Before we start breaking out the champagne, let's look at what is actually going on.

The SEC went from doing absolutely nothing to doing something.  A good first step.  The agency had gotten so bad under Bush appointee Christopher Cox that they  look like a public relations ambassador for  Wall Street.

After missing the financial meltdown and screwing up big time on the Bernie Madoff scandal, we knew  the SEC was going to make an example out of someone  To their credit, they didn't  hit a bunch of "easy to catch" small timers. They went after the biggest and baddest firm on Wall Street.  

No one has more clout in Washington and on Wall Street than Goldman Sachs.

Suing Goldman Sachs will definitely attract mainstream media cheerleaders. As Wilt Chamberlain aptly noted, "no one ever rooted for Goliath."

Especially if Goliath is a Wall Street firm that took taxpayer bailout money and paid themselves million dollar bonuses.

I don't have any problems with the SEC going after Goldman Sachs.  I  just wonder if they are going after the right  people and the right situation.

The SEC lawsuit is based on the actions of Fabrice Tourre, a 31 year old Goldman Vice President. As Peter Huang, a securities law professor at Temple University told the Wall Street Journal,  "The SEC has the tricky job of showing that Goldman was reckless in deceiving investors."

In short, the lawsuit is not a slam dunk.

When you start looking at Goldman Sachs, there  are a lot of high level decisions that need to be completely investigated.  Many related to the bailout money they took.

I've been opposed to the Wall Street bailouts from day one. I looked at the cast of characters and decided that the American people were going to get  taken, while Wall Street and Washington insiders would make out like bandits.

I called that one correctly.

As Ronald Ricker pointed out in a Huffington Post piece, Goldman was given $12 billion in   taxpayer bailout money in 2008.  A year later, they paid out $19 billion in bonuses to their employees.

Sounds like a great place to be on the payroll.   

The Goldman story gets worse.  

One of the most unusual moves during the whole bailout  fiasco was the bailout of AIG.    AIG is an  insurance company.  Insurances companies  are regulated by states, not the federal government and certainly not by the Federal Reserve Board.    

On September 16, 2008  The Federal Reserve,  an organization designed to provide liquidity for banks,  announced that the Federal Reserve Bank of New York was giving AIG an $85 billion line of credit.  AIG has gotten billions more since then.

The Secretary of the Treasury at that time was Henry "Hank"  Paulson. His previous job had been head of Goldman Sachs.   The Federal Reserve Bank of New York was headed by Timothy  Geithner.  He took Paulson's place as  Secretary of the Treasury.   

Shortly before the AIG bailout, Paulson let Lehman Brothers, one of Goldman's biggest rivals, go into bankruptcy.  There was  no bailout money  for  Lehman. There was not even  a shot gun marriage/merger  like Paulson arranged with Morgan Stanley and  JP Morgan Chase.  

When all the dust settled, Paulson's  former  rivals at Lehman,  and a chief competitor of  Goldman, was out of the game. While AIG stayed in.

It gets even worse than that.

A  very complicated part of the bailout was related to companies that were "counterparties" to AIG.  Counterparties were financial institutions that AIG owed money to.  Goldman Sachs and other companies that  had gotten money from bailouts got even more government money as it was funneled back to pay AIG's claims 100 cents on the dollar.

Taxpayers put up all the money and got none of the rewards.  It was  multi billion dollar windfall for Goldman and the other AIG counterparties.

In his days on Wall Street, I can't  imagine that Paulson ever cut a deal as one sided.

 If he had, he would never have lasted as head of Goldman Sachs.

Even Federal Reserve Chairman Ben Bernanke said  the move hurt the taxpayers.  "If a federal agency had  on September 16, 2008 , they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate. That outcome would have been far preferable to the situation we find ourselves in now."

It was the biggest scandal  related to the bailout.  And swept under a rug.  I don't see them dragging anyone off in handcuffs over the AIG saga.  I have not even seen a civil charge.

Geithner is now President Obama's top dog at Treasury.  His former boss Bernanke was re-appointed by President Obama for another term.  Paulson is out promoting his new book.

The civil suit by the SEC  allows the government to pretend they are more like Elliott Ness than Barney Fife.  They can put all their firepower into getting a positive result out of the lawsuit.   It's easier to go after a 31 year old Vice President than the current and former Secretary of the Treasury.

 The current suit will have little impact on Goldman in the long run. Goldman will still keep racking up hefty profits,  still keep paying the employees multi million dollar bonuses and still finding a way for its friends and alumni to work for the government agencies regulating it.

It could be that Henry Paulson, and Geithner  are truly  innocent guys just doing their jobs.   

It could be that Ben Bernanke is really a genius and deserved to have his picture slapped on  the cover of Time Magazine as "Man of The Year."  

It could be that everything wrong at Goldman was contained to a 31 year old Vice President.

The could be that  moon is made out of green cheese.

Just don't ask me to believe it.

I'm  a skeptical of what Washington and Wall Street are doing.  After a lifetime of hearing  government statements like "Watergate   was a third rate burglary,"  "Oswald acted alone,"  "Iraq has weapons of mass destruction" and "I did not have sex with that woman,"    I have a right to be.

We've been told that Goldman Sachs is too big to fail.

Now I wonder if they are too big for jail.

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