Americans will hear plenty of moaning and criticism from Republicans before November’s election about the Democrats’ financial reform bill, which they claim will swamp Wall Street with too many regulations and bog down the economy. When they start that act, remember the $550 million payment that Goldman Sachs – Wall Street’s presumed gold standard for investments by banks, pension funds and insurance companies – agreed to pay last Thursday to settle a civil lawsuit brought by the government on charges that the company fraudulently deceived its own clients.
Though it effectively admitted only “mistakes” and wrongdoing, it denied committing outright fraud. Never mind. The activities at the heart of the Securities and Exchange Commission’s lawsuit speak for themselves.
As the housing market was beginning to falter in early 2007, Goldman admittedly organized a custom-made package of derivatives loaded with sure-to-fail toxic mortgages at the behest of John Paulson & Co.’s hedge fund. The portfolio, called Abacus 2007-AC1, was allegedly custom designed by a Goldman vice president, Fabrice P. Tourre, in consultation with Mr. Paulson, who wanted to bet against the fund through credit default swaps after Goldman sold it to its clients.
Goldman then sold investments in the portfolio to a number of large clients. Their investments in Abacus 2007-AC1 – or roughly 99 percent of them – subsequently tanked in the mortgage crisis and the resulting financial implosion in 2008. Mr. Paulson’s hedge fund made more bundle off his negative bets against the portfolio.
Goldman admitted in its settlement with the SEC that it made the “mistake” of not telling its clients, in its marketing materials or representations, of Mr. Paulson’s involvement in designing the fund in order to bet against it. The company, in fact, maintained when the lawsuit was filed that it possessed the prerogative of hedging its own bets by doing such deals and quietly investing against investments that it recommended to its clients.
If that’s the case, comprehensive financial reform – and a far higher standard of ethics – is more sorely needed than Goldman’s executives, and those at other Wall Street companies, want to admit.
Ordinary Americans would be reasonably inclined to believe that Goldman’s admission to such scandalous “mistakes” would be sufficient to prove fraud and to destroy the firm’s reputation and financial stature. But that’s not the way it works on Wall Street. Indeed, its shares went 5 percent higher in after-hours trading when word of the agreement got out Thursday afternoon. However humbling it might have been to make the settlement, Goldman’s value quickly outgained the cost of the penalty.
Goldman clearly possessed the resources to contest the SEC lawsuit for years to come. After all, it made profits of $13.38 billion last year in an economic trough. The bank apparently just made the calculation that it would be more beneficial to settle, and admit wrongful mistakes, simply to eliminate the cloud that had hung over the firm since the charges were filed. And Wall Street agreed.
That is as revealing as Goldman’s settlement conditions. Goldman had to agree to change how it reviews and approves the offering of certain mortgage instruments. It also had to state its “regrets that the marketing materials did not contain that disclosure” of Mr. Paulson’s role in creating the Abacus 2007-AC1 portfolio. And it had to effectively acknowledge wrongdoing by consenting to a judicial order that barred it from committing intentional fraud under federal security regulations in the future.
The most disheartening part is that Goldman, and other Wall Street firms, apparently are not bothered when they are caught in such scandalous behavior. Their concern is self-enrichment. In fact, their pragmatic lobbyists accepted weeks ago that Democrats would successfully push through financial reform, and they began in June focusing on how they shape the ensuing regulations that now must be written.
Republicans’ criticism of reform is part and parcel of that contrived dance. Americans must need wonder if any new regulation can be made tough enough to restrain Wall Street’s greed and correct its behavior.