The United States Securities & Exchange Commission has filed a civil action charging Goldman Sachs with securities fraud in connection with the sale to Goldman clients of a fund created by hedge fund manager John Paulson as a “basket” of the derivative securities which Paulson believed were most likely to fail. According to the SEC, Goldman did not disclose to its clients which purchased these securities that Goldman had secretly “stacked the deck” against its own clients.
The SEC Complaint seeks $1billion, a sum less than Goldman’s annual budget for travel and entertainment. However, this case deserves the world-wide attention it is receiving because it re-establishes, for the first time in America since Stanley Sporkin was the head of the SEC Enforcement Division that there are no longer any “Sacred Cows” on Wall Street. In addition, this case, which is only the tip of the iceberg, will lead to far larger civil claims against Goldman and marks the end of financial deregulation. Expect the demise of flash trading, dark pools, unregulated derivative securities, analysts and investment bankers within a firm “coordinating” their efforts.
The SEC has long been underfunded and understaffed. Adjusted for inflation, the SEC has no greater enforcement budget than the 1970s, while the financial world has grown exponentially both in scale and complexity. For too long, the SEC has focused upon the low-lying fruit of micro-cap stock fraud involving obvious, and small, frauds of all varieties by a kaleidoscopic motley crew of affinity fraud Ponzi schemes, penny stocks, cures for cancer, resources discoveries of gold, silver, oil, natural gas, ostrich farms, worm farms, and old-fashioned “take the money and run” scams.
The Goldman case sends the message that there’s a new Sheriff in town, and he’s gunning for the big bad guys. The message was reinforced by the selection of Richard L. Simpson, Esq. to lead the case against Goldman. Like giving the ball to your best player to take the key shot, the SEC is represented by its most-experienced top-level enforcement lawyer, together with a top-tier group of SEC enforcement lawyers and staff.
The stock market got the message and punished Goldman shares, as well as the general market. The media coverage was world-wide and nobody but small children and simple adults gave any credence to Goldman’s indignant denials of any wrongdoing. To be blunt, the major Wall Street firms have lost their remaining credibility following scandal after scandal, decade after decade, ultimately leading to the worst financial crisis since The Great Depression. The “Savings & Loans” debacle was different than the “Sub-Prime Crisis” principally in that the damage done was so far less to the United States of America. Greed, arrogance and power, combined with unlimited leverage and very limited oversight, magnified the financial crisis beyond any recent bubbles because prior financial deregulation had made the SEC a toothless tiger content to eat mice while the raptors roamed Wall Street and ate everyone else alive.
Goldman Sachs will survive. Salomon survived rigging the market for United States Treasury Bonds in 1991, and lived to rig the markets for hot IPOs in the Internet bubble period at the end of that decade. A Salomon alumnus of playing “Liar’s Poker” is the Mayor of New York City, Michael Bloomberg. The other major Wall Street firms all participated in the manipulation of hot IPOs in the late 1990s, including Goldman Sachs. The major Wall Street firms all participated in “pay to play” with public officials to obtain municipal bond business, to be a financial advisor to the funds and knowingly sell public employee pension funds high-risk derivative securities which became worthless.
Goldman Sachs used to regularly supply America with the Secretary of the Treasury, as well as Mayors and Governors and Senators galore. Goldman Sachs had access everywhere in the world, because money talks, big money talks louder, and really big money whispers.
No one should have any illusions that Goldman will lose any access or make any less money over the long run because the likely outcome of a protracted battle in SEC v. Goldman Sachs is a consent decree in which Goldman neither admits nor denies the allegations and pays a fine equivalent to a speeding ticket to a person of ordinary means.
Nor should anyone have any illusions that, in the not-too-distant future, America and the rest of the world will forget what happened and end up cheering for a recidivist enemy of the American people rich enough, and connected enough, to blur the truth and remain invulnerable. H.L. Hunt called for the assassination of the President of the United States of America, John F. Kennedy, and celebrated upon learning the “good news.” His sons, Lamar Hunt and Nelson Bunker Hunt, manipulated the silver futures market in America and got away with a slap on the wrist. Lamar’s son, Clark Hunt, is heralded as a “sportsman” and less well-known as the long-time business partner of convicted felon Barrett Wissman.
Money may not buy happiness, but money definitely can buy power, and power can make enormous sums of money, feeding an endless cycle. Plus, money can buy goodwill, rebuild a brand name, and focus the average American’s attention upon other, more important matters, whether NASCAR or “The Stupor Bowl.” If the Kansas City Chiefs are in the game, the camera will pan to the owner’s box to show Clark Hunt with his hand over his heart and tears in his eyes during the pre-game singing of “The Star-Spangled Banner” and few in the audience will remember or note the bitter irony.
Former President Clinton pardoned the only fugitives ever to receive Presidential Pardons. Coincidentally, the pair was billionaire Marc Rich and his partner-in-crime “Pinky” Green. Goldman does metals trading and other financial transactions with Marc Rich every business day, nor is Goldman alone. President Clinton became the US Envoy to Haiti. Coincidentally, Barrick Gold had previously announced the first major gold discovery in that impoverished nation.
If one looks to the other side of the aisle in America, it’s even worse. Republican-protected Halliburton actually was complicit in the murder of over two hundred villagers in Africa whose only crime was their refusal to leave their shack homes to get out of the way of the pipeline being built by Halliburton. Blackwater “wet work” teams of private mercenaries murdered at least 17 Iraqi civilians.
Goldman Sachs will survive and prosper in the long run, as long as money buys power, and that’s a very long time.
Disclosure: I was a lead counsel in the IPO Securities Litigation against the major investment banks, and other litigation against the large brokerage firms. I represent a client in a pending action against Barrett Wissman and Clark Hunt. I worked with Rick Simpson in the Crazy Eddie case. I hate hypocrisy.