The case against Goldman

The powerhouse Wall Street investment bank Goldman Sachs this week vowed an aggressive defense of fraud charges filed by the Securities and Exchange Commission, but the firm faced continued fallout from the allegations. The SEC last week charged Goldman with failing to disclose a conflict of interest when it sold a complex financial security, called Abacus. Abacus was created for hedge fund manager John Paulson, who had specifically requested that Goldman create a package of low-quality mortgages that he could “short,” or bet against—in effect designing the security to fail. Paulson made $1 billion when the value of Abacus plunged, while U.S., British, and German financial firms lost hundreds of millions of dollars. The SEC reportedly voted 3–2 along party lines to charge Goldman, after months of secret negotiations failed to produce a settlement.

Goldman had “every incentive to play fast and loose,” said Andrew Leonard in Salon.com. As Washington retreated from regulating the financial industry, firms behaved in “ever more reckless and greedy ways.” In this anything-goes environment, Goldman apparently thought that there was nothing morally or legally wrong with selling toxic products that were designed to fail. Now that the SEC has “brought the hammer down,” perhaps Wall Street will finally clean up its act.

But the case against Goldman is “flimsy,” said Sebastian Mallaby in The Washington Post. The institutions that got burned were not babes in the woods. They were sophisticated investors who knew—or should have known—they were taking a risk. In fact, the very essence of such trades is that somebody else is “betting that they will lose value.”

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Whether or not Goldman broke the law, said Roger Lowenstein in The New York Times, the case demonstrates how far “Wall Street has strayed from its intended mission.” We need Wall Street to help raise money to finance economic activity, not to create mind-bogglingly complex instruments whose only purpose is to be bet upon. These products “raised nothing for nobody,” but they did help bring the economy to the brink of collapse.