Friday, April 16, 2010

Timing is Everything

As the storm clouds gathered over Washington, D.C. in the run up to the battle over financial regulatory reform, a little ray of sunshine peeked out and shone on President Obama and his band of reformers. The SEC nailed the Big Kahuna, the Vampire Squid, the biggest swinging Mickey of them all for fraud - Goldman Sachs.

The beauty in this is in the timing of the announcement - a ringing endorsement for regulation and oversight on the virtual eve of the battle to get the reform bill through Congress. It is difficult to tell your constituents that you are voting against financial reform when they can read in the papers that yet another bank was involved with fraud. It also dovetails nicely with the SEC's quest for additional funding.

The charge against Goldman is, of course, serious. A GS vice president (a Frenchman - perhaps channelling Jerome Kerviel?) structured a sub-prime portfolio on hedge fund giant Paulson & Co's advice, which Paulson then promptly shorted against. The bottom line is, however, not so serious. GS will get slapped with a fine and might have to make some of the investors whole, but that is chicken feed for the bank. (If it remains a civil crime that is. If the Department of Justice gets involved, it might open a different can of worms.)

Paulson comes out of it looking less like the genius that predicted (and cashed in on) the financial crisis and more like a criminal mastermind who found a willing patsy. The hedge fund shows the world exactly how far some of them will go to make the returns their wealthy clients demand. (Which reinforces the regulation of hedge funds too.)

Goldman's Fabrice Tourre (who called himself "Fab" in an email) comes out looking like a sap. I wonder how much Goldman could have been paying him if he was that motivated to break the law. I guess keeping up with the Joneses in Tribeca is a seriously expensive endeavor.

Nabbing Goldman Sachs is a shot across the bow to those Congressmen who thought the regulations we had worked "jus' fahhhn." They did not. But Congressmen are under almost unprecedented pressure from Wall Street lobbyists. There are reportedly four financial industry lobbyists for each politician in the house and the senate. Larry Summers said in an interview that the lobbyists were spending on average $1 million per Congressman.

The crux of the matter is capitalization. Capital requirements have to be raised in order for Wall Street to be able to bail itself out next time. The trouble is, Wall Street does not want to waste good trading money by keeping it in the bank (especially if they pay themselves the same crappy savings rates the banks pay us).

So those Congressmen on the Wall Street side might have to step into the middle of the road before the upcoming vote. Their constituents may be able to see the picture a little bit more clearly now. The government gave Wall Street a bucket load of money, which was spun into golden bonuses. For Wall Street. And all the while it was smiling and nodding and "Three Bags Full"-ing, and continuing to rip the faces off investors.

Critics of the financial reform bill are already screaming that you can't legislate against fraud. That may well be. But you CAN find the fraudsters and nail them as long as the regulators have the authority and the tools to do so.  The SEC is doing better all the time, but it remains seriously underfunded. It has a big hill to climb and one showcase conviction is not enough. 

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