More Goldman v. SEC - legally weak - but still potentially effective (TheBigPicture)

SEC v. Goldman Sachs; Timing and Methods are Curious

 

By Jack McHugh - April 19th, 2010, 10:20PM

Good Evening: U.S. stocks spent most of Monday trying to recover from the outright shock they received on Friday when the SEC decided to bring civil fraud charges against Goldman Sachs. The news caused stocks to swoon as last week ended, while bonds and the dollar rose. Commodities, but especially the precious metals, were bludgeoned. After every financial talking head from New York to Germany weighed in on the Goldman case over the weekend, markets around the world headed down in sympathy with Friday’s decline in U.S. share prices. China’s decision to rein in mortgage lending (memo to the Maestro: this is how it’s done — beforethere’s a problem) also played a role in pushing global bourses back on their heels.

When follow through selling in the U.S. dried up on Monday, however, share prices recovered to finish mixed. Even GS shares rose ahead of its earnings announcement tomorrow. Bonds gave back some of Friday’s gains, the dollar was up a fraction, and commodities remained under pressure. After weeks with little to concern them, investors are definitely starting to reassess their risk appetites. With the benefit of a few days of hindsight, I find it curious that the SEC handled its case against Goldman in the way it did. The timing (with financial reforms being teed up in Congress) and methods (using the term, fraud, and giving Goldman little or no warning) will leave thoughtful citizens wondering why.


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Case closed, right? In a court of law, perhaps, but this case will be waged more in the court of public opinion than it will before any bench. I’m sure the SEC will maintain that it is bringing this case to send a message that its lapdog days are over, that no firm — not even the venerable Goldman Sachs — is beyond its reach. I agree, and it’s high time the SEC resumed its enforcement role. But I worry about the over-reach, especially if done so for political purposes. Over-reaching themselves during the previous credit cycle, the banks can rightly be claimed to have brought actions like this upon themselves. But I think even populists would agree that if this case was brought to stir partisan passions and boost pending legislation, then the SEC’s investigation into the ABACUS transaction should have been handled in a different way. A Trojan Horse might be a clever way to achieve an objective, but the bad memories tend to linger for both giver and receiver. Troy is no more, and Greece isn’t faring much better itself these days. Let’s hope the U.S. and its banking system both fare better after this episode runs its course.

– Jack McHugh