FacebookTwitterGoogle+RedditEmail

Goldman in the Dock

Just two days after a marathon 10-hour hearing before the Senate Permanent Subcommittee on Investigations, Goldman Sachs learned that it is the target in a criminal investigation conducted by the U.S. attorney in Manhattan. Goldman has been accused of fraud by the SEC (in a civil suit) in connection to the sale of complex securities (CDOs) tied to subprime mortgages. Allegedly, the CDOs were designed to fail. The charges have raised Goldman’s public profile and caused severe damage to its image as a company that serves the interests of its clients. The news of a federal probe could be a major hit to the bank’s short-term prospects and profitability. According to  Friday’s Wall Street Journal:

“Federal prosecutors are conducting a criminal investigation into whether Goldman Sachs Group Inc. or its employees committed securities fraud in connection with its mortgage trading, people familiar with the probe say.

“The investigation from the Manhattan U.S. Attorney’s Office, which is at a preliminary stage, stemmed from a referral from the Securities and Exchange Commission… The SEC recently filed civil securities-fraud charges against the big Wall Street firm and a trader in its mortgage group….The criminal probe raises the stakes for Goldman, Wall Street’s most powerful firm.” (“Criminal Probe Looks Into Goldman Trading” Wall Street Journal)

The public is paying close attention to developments in the case and video clips from the senate subcommittee hearings have been widely circulated on the Internet and used as fodder by late-night comedians. The depth and severity of the ongoing recession has created a need to find a scapegoat, one company who more than any other embodies the recklessness and voracity which led to the biggest financial crisis since the Great Depression. Goldman Sachs is that company.

News of the investigation has already roused Wall Street and put fear in the hearts of hedge fund managers and investment bankers who wonder if they’ll be next in line.  The public is likely to support aggressive action by the Department of Justice to hold the fraudsters accountable and to ensure that investors and homeowners are protected in the future. The question is whether the investigation is an honest attempt to reign in Wall Street or a political stunt to build support for President Obama’s financial reforms that are stuck in the senate?

On Thursday, Reuters reported that Goldman planned to settle its fraud case with the SEC.   Apparently, CEO Lloyd Blankfein decided that it would be wiser to pay a hefty fine and put the matter behind him than risk another drubbing like he suffered earlier in the week before the senate subcommittee. Now that option has been taken off the table. A full-blown criminal investigation means that Blankfein will be spending his days trying to explain why misleading his clients is a laudable business practice and not a felony. And, for Goldman shareholders, the news is even worse. With the country already in a lather over Wall Street’s transgressions, the case could snowball into a reputation-busting main event. If the case goes to court, the networks will be stumbling over themselves to cover every lurid minute of the trial while deploying their footsoldiers to go through Blankfein’s personal file with a fine-tooth comb.

Wall Street Journal:

“Over the years, the government has been reluctant to criminally charge financial firms with wrongdoing because the charge itself can cause a business to implode. Some investing clients can’t or won’t trade with a firm facing such a taint.

Indeed, in the more than two-century history of the U.S. financial markets, no major financial firm has survived criminal charges. Securities firms E.F. Hutton & Co. and Drexel Burnham Lambert Inc. crumbled after being indicted in the 1980s. In 2002 Arthur Andersen LLP went bankrupt after it was convicted of obstruction of justice for its role in covering up an investigation into Enron Corp. The conviction was later overturned by the Supreme Court.”(“Criminal Probe Looks Into Goldman Trading” Wall Street Journal)

As the WSJ points out, the stakes couldn’t be higher. But is the SEC serious or is this just carefully choreographed political theater? No one knows for sure, but the markets aren’t going to like it, especially if their Golden boys start blabbering about where all the bodies are buried. That’s the nightmare scenario–“contagion”– one criminal investigation after another spreading through Wall Street like a virus. But it could happen. The word is out that the SEC’s new Director of Enforcement Robert Khuzami is eager to prove he’s got the sinew to take down the biggest firm on the street. There’s nothing that would make John Q. Public happier than seeing a phalanx of SEC regulators in full police regalia goosestepping through lower Manhattan. People are tired reading about bankers pulling in billions, and being fleeced by them.

The SEC wouldn’t make a move like this unless they had a pretty solid case. That means that Khuzami may be getting information from a disgruntled former employee, someone who knows how Goldman works from the inside.  A criminal case means documentation, hard evidence, and proof of intent. That’s a tall order, and not one that the SEC would take lightly. After all, Khuzami vs. Goldman will be “winner take all” contest ; the 52 year old attorney will either be heaped with  praise or face a career flame-out.

But Khuzami has his work cut out for him. Goldman will enlist every lawyer from Orlando to Portland to plead its case. And crossing swords with Blankfein will be the easy part. The hard part will be the rearguard action from the Geithner/Summers block within the administration. An attack on Goldman is an attack on Obama’s financial braintrust, and it’s bound to trigger a split within the White House. Remember how Geithner stuck his neck out to make sure that Goldman got 100 cents on the dollar for its credit default swaps (CDS) with AIG?   Government officials don’t do that unless they’re working for the other side.  Geithner is a Goldman loyalist, just like many other of Obama’s lieutenants.

What people want is justice.  And revenge.

MIKE WHITNEY lives in Washington state and cvan be reached at fergiewhitney@msn.com



 

More articles by:

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

Weekend Edition
May 25, 2018
Friday - Sunday
Melvin Goodman
A Major Win for Trump’s War Cabinet
Andrew Levine
Could Anything Cause the GOP to Dump Trump?
Pete Tucker
Is the Washington Post Soft on Amazon?
Conn Hallinan
Iran: Sanctions & War
Jeffrey St. Clair
Out of Space: John McCain, Telescopes and the Desecration of Mount Graham
John Laforge
Senate Puts CIA Back on Torture Track
David Rosen
Santa Fe High School Shooting: an Incel Killing?
Gary Leupp
Pompeo’s Iran Speech and the 21 Demands
Jonathan Power
Bang, Bang to Trump
Robert Fisk
You Can’t Commit Genocide Without the Help of Local People
Brian Cloughley
Washington’s Provocations in the South China Sea
Louis Proyect
Requiem for a Mountain Lion
Robert Fantina
The U.S. and Israel: a Match Made in Hell
Kevin Martin
The Libya Model: It’s Not Always All About Trump
Susie Day
Trump, the NYPD and the People We Call “Animals”
Pepe Escobar
How Iran Will Respond to Trump
Sarah Anderson
When CEO’s Earn 5,000 Times as Much as a Company’s Workers
Ralph Nader
Audit the Outlaw Military Budget Draining America’s Necessities
Chris Wright
The Significance of Karl Marx
David Schultz
Indict or Not: the Choice Mueller May Have to Make and Which is Worse for Trump
George Payne
The NFL Moves to Silence Voices of Dissent
Razan Azzarkani
America’s Treatment of Palestinians Has Grown Horrendously Cruel
Katalina Khoury
The Need to Evaluate the Human Constructs Enabling Palestinian Genocide
George Ochenski
Tillerson, the Truth and Ryan Zinke’s Interior Department
Jill Richardson
Our Immigration Debate Needs a Lot More Humanity
Martha Rosenberg
Once Again a Slaughterhouse Raid Turns Up Abuses
Judith Deutsch
Pension Systems and the Deadly Hand of the Market
Shamus Cooke
Oregon’s Poor People’s Campaign and DSA Partner Against State Democrats
Thomas Barker
Only a Mass Struggle From Below Can End the Bloodshed in Palestine
Binoy Kampmark
Australia’s China Syndrome
Missy Comley Beattie
Say “I Love You”
Ron Jacobs
A Photographic Revenge
Saurav Sarkar
War and Moral Injury
Clark T. Scott
The Shell Game and “The Bank Dick”
Seth Sandronsky
The State of Worker Safety in America
Thomas Knapp
Making Gridlock Great Again
Manuel E. Yepe
The US Will Have to Ask for Forgiveness
Laura Finley
Stop Blaming Women and Girls for Men’s Violence Against Them
Rob Okun
Raising Boys to Love and Care, Not to Kill
Christopher Brauchli
What Conflicts of Interest?
Winslow Myers
Real Security
George Wuerthner
Happy Talk About Weeds
Abel Cohen
Give the People What They Want: Shame
David Yearsley
King Arthur in Berlin
Douglas Valentine
Memorial Day
FacebookTwitterGoogle+RedditEmail