On Friday, Goldman Sachs was charged by the Securities and Exchange Commission with fraud in the formation and marketing of a mortgage backed product, a so-called Collateralized Debt Obligation.
The gist of the allegations is that Goldman Sachs failed to disclose that a major hedge fund both helped in the selection of the mortgages to be included in the CDO and took a short-position against the CDO, thereby betting it would fail. In newspaper headline lingo, the product was doomed to fail to benefit a Goldman Sachs client.
The case is not as open and shut at the newspapers headlines make it seem. The theory is something of a test case based on the failure to disclose risks which the sophisticated institutional purchasers allegedly should have understood:
The SEC's case against Goldman and a vice president at the firm, Fabrice Tourre,
hangs on a single critical contention. The SEC says Goldman sold investors a product linked to the performance of certain mortgages without telling them that a hedge fund betting on the mortgages' demise helped design the product.
Several lawyers not involved in the case said the evidence, as laid out in the SEC's complaint, is deep enough to support the civil fraud charges. "From the complaint, it looks pretty strong," said Jill Fisch, a law professor at the University of Pennsylvania. "It's a test case in terms of the SEC going forward both for whether they're successful and, if they settle, will it be a meaningful penalty," she said.
The allegations are serious, but there is an equally serious question: Why now?
Allegations that Goldman Sachs "bet against clients" have been around for months, and led to a fairly spirited denial. The charges could have been brought weeks ago, or weeks from now, and there would have been no difference to the cause of securities regulation.
Is it coincidence that suit was brought just as the Obama administration and Chris Dodd were rolling out financial services reform with a quick vote planned in the Senate?
Call me a skeptic. But skepticism is warranted whenever this administration claims crisis, as in the phony "crisis" which led to the ramming through of the Stimulus Plan before anyone could read it, and the health care "crisis" which required repeated phony deadlines followed by extraordinary measures including payoffs to Senators and budget reconciliation.
Having created or found a crisis, the Obama administration is in full campaign mode to push sweeping financial regulation through Congress on another party-line vote, if it can pick off one Republican Senator. Hence, the push is on to ratchet up public pressure using Goldman Sachs as an excuse.
On Saturday, Obama made financial industry reform the focus of his weekly radio address, using the language of crisis (emphasis added):
"The consequences of this failure of responsibility -- from Wall Street to Washington -- are all around us: 8 million jobs lost, trillions in savings erased, countless dreams diminished or denied, " Obama said. "I believe we have to do everything we can to insure that no crisis like this ever happens again."
Over the weekend the Obama public relations machine began sending out e-mails again invoking the alleged crisis (emphasis mine):
It has now been well over a year since the near collapse of our entire financial system that cost the nation more than 8 million jobs. But the flaws in our financial system that led to this crisis remain unresolved.
Wall Street titans still recklessly speculate with borrowed money.
We cannot delay action any longer. It is time to hold the big banks accountable. Arm-twisting lobbyists are already storming Capitol Hill, seeking to undermine the strong bipartisan foundation of reform with loopholes and exemptions for the most egregious abusers of consumers.
It's a fight worth having, and it is a fight we can win -- if we stand up and speak out together.
So far, all 41 Republican senators have signed a letter opposing reform -- but there is still time for individual senators to do the right thing.
President Barack Obama
The Goldman Sachs suit explicitly is being used as the main talking point to overcome Republican objections to the current form of the bill (emphasis mine):
- Goldman Sachs case could help Obama shift voter anger: "Fraud charges leveled against the investment bank Goldman, Sachs & Co. center on complex financial dealings. But for President Obama, the accusations against the venerable Wall Street institution offer a chance to revitalize a simple political narrative that he has all but lost in recent months: that he and his party are protecting ordinary Americans victimized by the economic meltdown."
- Democrats Seize on Oversight: "With the Senate scheduled to begin debate on a financial overhaul bill this week, the fraud lawsuit against the Wall Street titan Goldman Sachs has emboldened Democrats to ratchet up pressure on Republicans who oppose the Obama administration’s proposal."
- Goldman Suit Harnessed for Internet Ad Campaign: "President Barack Obama’s political advisers are trying to harness the government’s case against Goldman Sachs Group Inc. to build support for a financial- markets overhaul pending in Congress. A Google Inc. search of “Goldman Sachs SEC” yields an advertisement entitled “Help Change Wall Street” that is sponsored by Organizing for America, Obama’s official political arm outside the White House."
We've been here before. No crisis is allowed to go to waste, and if there is no crisis, create one. And at all times, find an enemy against whom to campaign.
The suit against Goldman Sachs may have merit, or it may not. We will not know for a while. In the meantime, this administration will use the "crisis" for its own political purposes and isolate and demonize an enemy, as it always does.
Once the administration gets the legislation it wants, the actual "crisis" will be but a distant memory, a mere detail on the road to sweeping regulation which no one will understand at the time of the vote, and which will have untoward unintended consequences which will last for decades.
The timing of the Goldman Sachs suits smells. And with this administration, where there's a smell, it stinks.