Knives sink into Goldman

The SEC’s case against Goldman is limited to one mortgage market security called Abacus,but the subcommittee’s domain of interest is wider—the systemic shock of many such speculative deals across Wall Street. Senator Carl Levin drove home the policy value of the hearings for the whole of Wall Street by emphasising that his brief was to assess whether to “bar similar actions in the future”.

His allusion here is to toughening the Barack Obama administration’s financial regulation bill that is currently stymied in the Senate. The timing of the SEC’s announcement of civil fraud allegations against Goldman appears to have been coordinated to ease the path of the long delayed bill,which proposes the most sweeping regulation of Wall Street since the Franklin Delano Roosevelt era.

Interestingly,the Obama administration has portrayed the SEC’s legal proceedings against Goldman as a bolt from the blue about which the executive branch of government had no clue. Treasury secretary Timothy Geithner claims that the SEC gave no advance notice to the Obama team about its suit on Goldman and that it had taken a “fully independent” decision.

The problem with this narrative is that there was intense partisan politicking within the SEC earlier this month about whether or not to go public with charges against Goldman. Of the five commissioners of the SEC,three who were appointed by the Democratic Party voted in favour of pillorying Goldman,while two who were Republican voted against this. The tiebreaker vote was cast by the SEC’s chairwoman Mary Schapiro,who was personally picked by Obama to replace George W Bush’s business friendly nominee Christopher Cox. The pro-Obama faction within the SEC must have timed the release of dirt on Goldman to break the impasse on the regulation bill and get it passed.

Organisational interests of badly tarnished regulatory bodies like the SEC and the Federal Reserve may also have played a role in the lawsuit against Goldman. James Pethokoukis of Reuters argues that after facing brickbats for abject failure to curb improprieties and white-collar crimes during the deregulatory heydays,the Obama- revamped SEC may have decided to come out fighting for its own institutional survival by locking horns with the biggest name in the business,Goldman Sachs.

Another quarter from which pressure has mounted against Goldman recently is overseas markets,where the firm offered consultancy and traded in vast flows of money. In the election-bound UK,embattled Prime Minister Gordon Brown ordered a “special investigation” by Britain’s Financial Services Authority into Goldman’s trading practices in the City of London. The German government has also demanded information from the SEC on Goldman’s Abacus CDO,which reduced the gullible German investor IKB to near bankruptcy and necessitated a state bailout.

Reports have also surfaced that the West African nation of Ghana is seething with frustration at Goldman for its involvement in digging the grave of Ashanti,once the world’s third largest gold mining company,in the late 1990s.

In an eerie curtain raiser to Abacus-like schemes,Ashanti was advised by Goldman in 1999 to bet on dropping gold prices and dispose of its inventory. Shortly after,another commodities trading section of Goldman coordinated with European banks to drive up prices of the metal. The result was that Ashanti ended up bankrupt. It was taken over by a British company whose advisors happened to be from the same Goldman Sachs! Such revelations follow earlier well-documented horror narratives about how Goldman’s advisors hid Greece’s public debts and triggered the worst economic crisis of the Euro zone.

The US Senate subcommittee has compiled evidence on at least five other Abacus-type rogue transactions in the subprime mortgage market where collateralised debt obligations were “designed to fail” and make a fast buck for Goldman. Probable direct culpability in the subprime housing bubble means the heat will be on the banking legend way beyond the SEC’s legal case on Abacus.

To defend its corner,Goldman has the cream of American financial lawyers on call and deep connections in the Obama administration and the US Congress. Political contributions and favours have always yielded the highest return on investment for Goldman and its peers. The political skill with which Goldman’s ex-bosses buried the Glass-Steagall Act during Bill Clinton’s presidency and also orchestrated the AIG bailout under George W Bush speak louder than the legal outcome of the contextually tiny Abacus case.

But with more muckraking on the anvil about Goldman and its Wall Street compatriots,justifying superlative profits and bonuses acquired through sleight of hand when honest Americans are in distress will be hard. Blankfein will need to draw upon every ounce of the company’s 141-year-old pluckiness to pull off an escape.

The author is associate professor of world politics at the OP Jindal Global University