Monday, April 19, 2010


Since the Securities and Exchange Commission (SEC) decided to file a civil suit against Goldman Sachs it appears that both Goldman Sacs and Wall Street may be in for a rough patch.

First up, we have former President Clinton telling ABC's Jake Tapper that he got bad advice on regulating complex financial instruments (derivatives) from his former Treasury Secretaries, Robert Rubin and Larry Summers (not to mention from Alan Greenspan). He even noted that he was wrong to take the advice of those advising him against regulating derivatives (which would include Greenspan).

While President Clinton did the Washington thing, and had his assistant call back later to say that his advisors served him and the nation well, his comments help us understand the mind-set that's emerging in Washington. It looks like a few "criminal" scapegoats may be hung out to dry before November.

MSNBC's Dylan Ratigan captures the moment with questions he raises about Goldman Sachs' explanations for the complex deals that lost billions for their customers, but helped John Paulson's firm earn $15 billion. In a few words Ratigan asks why Goldman didn't reveal that the same person (John Paulson) who created the investment vehicle Goldman's customers purchased was also the same person placing big bets that the product would fail. This is akin to buying a house that catches fire and burns to the ground, only to find out later that others who had access to your house before the sale had purchased insurance on your house.

All of this is significant because as a criminal case the SEC can become very aggressive in the "discovery phase" leading up to the trial by requesting information and issuing subpoenas that could prove quite damaging. Perhaps more importantly, as Martin Hutchinson points - and as I've suggested many times before - with the right evidence the SEC could invoke the Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO). To get a RICO case going on a Wall Street firm (which has been done before) the SEC would have to show a "pattern of racketeering activity" that was committed by an "ongoing criminal organization."

While this would be a pretty big event, labeling a firm like Goldman Sachs - who the Europeans haven't been too happy with lately - as a criminal organization would give the Obama administration some red meat to throw at the American public. Perhaps more importantly, it would go a long way in creating the right environment for much needed regulatory reform.

With the majority of Americans upset over lingering economic conditions, and the Republicans poised to defend Wall Street, going after Goldman might be part of a larger strategy that could even pit middle of the road Republicans against their Tea Party brethren. While it's never a good thing to use public policy as a political tool, it would be naive to assume it doesn't happen as a matter of course.

As well, with Wall Street acting the way they have over the past 15 years - and with the damage they have caused - it would be politically irresponsible for the Obama administration not to pursue this path.

- Mark

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