Finally, the watchdog bites.
One reason Americans are so disgusted with political and business leaders is that nobody seems accountable for the rapacious behavior that launched a crushing recession and tossed 8 million people out of work. Wall Street wrecked the economy, and for its trouble got gargantuan, taxpayer-funded bailouts that were supposed to trickle down to the little guy, but so far haven't. Meanwhile, practically nobody at AIG, Citigroup, Merrill Lynch, Bank of America, Lehman Brothers, Bear Stearns, General Motors, Fannie Mae, or Freddie Mac has been charged with anything other than greed, which isn't illegal. The honchos who caused the debacle occasionally tell a Congressional committee that they're sorry, but no major figure has done time or paid any restitution whatsoever.
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The Securities and Exchange Commission's suit against Goldman Sachs is an important pivot in the direction of accountability. The SEC has been a marginal player in the bank bailouts, because they've mostly been a problem of liquidity and solvency, not of fraud or corporate behavior, which the SEC regulates. But now the SEC is showing some teeth by charging Goldman with fraud for the way it marketed a complex set of derivatives linked to mortgage-backed securities. The SEC claims that in 2007, Goldman constructed a security called a collateralized debt obligation, or CDO, and persuaded clients to invest in it as if it were a sound investment. At the same time, according to the SEC, Goldman worked with another client—a big hedge fund—on other derivatives that would gain in value if the CDO fell in value. Goldman stood to gain either way, but investors lost more than $1 billion because the firm withheld "vital information," according to the SEC. Goldman denies the charges and vows to fight them in court.
The case could be hard to prove, and it's important to note that the SEC is filing civil charges against Goldman, not criminal charges, which would be more severe. The ultimate winners, however, might be Democrats running for reelection in the fall and facing voters who are enraged with both Wall Street and Washington. Up until now, voters have been waiting for trillions of dollars worth of government intervention in the economy to make its way to them. Much of that money has been funneled to banks like Goldman, in the hope that they'll funnel it to consumers in turn. But consumers aren't seeing it. To be fair, government action has almost certainly helped avoid a much worse meltdown. But unemployment remains painfully high, small businesses can't get loans, and the big banks are suddenly doing better than most other businesses in the country.
The Goldman case potentially gives the Obama administration and the Democrats running Congress a much-needed scalp—and a very rich one, at that. From a purely political perspective, Goldman is a great target: A recent Gallup poll shows that confidence in banks is near historic lows, and many Americans feel bottomless resentment toward financiers who make deals that generate lavish commissions, but don't really produce anything of value. The Goldman case probably won't be resolved by Election Day in November, but that might be even better for Democrats: They can claim they're finally going after Wall Street without the risk of a verdict that might not go their way.
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Goldman and the SEC could also settle, but that would probably have to be on terms that the SEC could clearly claim as a victory. And there might be more attacks on Wall Street, since many firms contrived CDOs like the one in the Goldman case. CDOs, in fact, form a big chunk of the "toxic assets" that caused banks to lose billions and led to the bailouts in the first place. Investors are clearly worried about more SEC suits: After the SEC announcement they bid down Goldman's shares, which isn't surprising, but also punished the whole financial industry, as if preparing for a spate of lawsuits that could depress profits.
Conventional wisdom puts the Democrats in a dire position come November, since unemployment will still be sky-high, voters seem more intent than usual on throwing out incumbents, and a new president's party typically loses seats in mid-term elections anyway. But it might be worth rethinking that. Republicans have made hay by opposing healthcare reform and the 2009 stimulus bill, two high-priced legislative monstrosities that voters are ambivalent about. Republicans are now opposing financial reform on the same principle of "just say no." But the calculation might be off. Republicans are trying to look like the party of restraint, but instead, they're starting to look like Wall Street lackeys doing the banks' bidding.
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The Goldman prosecution could sharpen the distinction and make Democrats look like the party seeking vindication for the woes of ordinary Americans. And other controversies might not do Democrats as much harm as expected. The stimulus spending will be largely complete by election time in November, allowing Democrats to fully tally the benefits it has brought, dubious or not. Widespread fears about the evils of healthcare reform might ease by then too, since nothing much is going to change by November. An Obama crusade against Wall Street might appeal directly to riled-up voters and turn a few extra votes toward Democrats. The SEC is supposed to be independent of politics, of course—but nothing in Washington is truly independent of politics. As Wall Street is learning.
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James of MN 12:27PM May 06, 2010
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Muser of NM 4:29PM April 17, 2010