My Belated and Obligatory Goldman Post

I realize that this is coming a week and a half too late (too late for me to contribute anything new or particularly meaningful to the subject in any event), but having saved a dozen or so tabs on my browser just for this occasion and this blog being that it is, I would have felt remiss in not at least mentioning the SEC v. Goldman thing, if only for continuity or posterity.

Information on the SECs complaint and Goldman's potential violation abound, and so I won't rehash the issue here. If you've missed or ignored it up until this point, there's this New York Times article from back in December, this more recent update, and this post at Baseline scenario, to name a few sources that explain the whole in clearer terms than I would be likely to muster.

There are a number of issues that this case raises. First, now that SEC has taken the rare step of actually doing something in its capacity as an enforcer, does this auger a change in attitude or approach at either the agency specifically or throughout the administration as a whole? Specifically, is this to be the first in a long line of cases brought by the government against financial malfeasance or is this going to be, much like the case against Madoff I think, an easy way to blame the entire financial crisis on a few bad people doing a few bad things and to ignore a system-wide overall in the process? Which is all to paraphrase Yves Smith who writes:

it is too early to tell whether this suit is indeed the beginning of a concerted initiative (with the initial litigation allowing the SEC to perfect its legal arguments and uncover more information through the discovery process) or simply an effort to address (as in appease) to a public mad as hell about no-questions-asked bank bailouts and continuing subsidies to the financial services industry. (NakedCapitalism)

The timing of this case, given the current wrangling over financial regulatory reform, could really be interpreted either way, I think.

But there are some positive signs, according to Bonddad:

[I]n government based litigation, the government is going to argue more or less the same thing in a line of cases. Therefore, they usually bring their best case first to set a precedent for other jurisdictions to follow (this is what the IRS does in anti-avoidance litigation). I'm guessing this is the government's best case in this area. In correlation, the SEC is desperately trying to re-establish itself as a potent enforcement arm. I don't think they would bring a case right now unless they thought they had as close to a slam dunk case as possible.

Admittedly, those are some pretty thin tea leaves: little more than speculation, it seems to me. Either way, Bonddad makes a compelling case that whatever the motivation behind bringing this case at this time in this way, the SEC is forcing Goldman to fight this issue out in the public (a settlement would open the bank up to an onslaught of civil charges). From a policy perspective, the more attention this gets, the more pressure members of congress receive to actually act against this nonsense, the better.

Second, this all brings to mind the all-too-familiar conclusion: so much of modern finance is socially useless. As far as I can tell, none of the financial products or arrangements in the Goldman-Paulson deal, like those in the strikingly similar Magnetar scheme explained on last week's This American Life, like those concocted by Lehman Brothers according to this New York Times article, serve any good whatsoever, even by the standard definition of social good offered by finance academics and bankers. In many cases, the opposite seems just as likely to be the case.

More than anything, a lot of it amounts to complexity for the sake of complexity. Smoke and mirrors serve the interest of banks. It makes it that much easier to maximize fees, over-price assets, and circumvent regulation. And within the banks themselves, based on the recent testimonies of Robert Rubin and Charles Prince--

Even his lofty title at Citigroup didn't involve frequent meetings and "wasn't a substantive part of the decision-making process," Mr. Rubin told the panel...Mr. Prince said he wasn't aware that Citigroup traders decided to keep on the company's books $40 billion of super-senior collateralized debt obligations, pools of assets tied to subprime mortgages. "After all, having $40 billion of [highly rated] paper on the balance sheet of a $2 trillion company would typically not raise a concern," he said. Such assets eventually produced losses of $30 billion. (WSJ)

--the complexity and scale of the institutions and transactions involved make it virtually impossible for the left hand to know what the right is up to. Or at least, it provides management with an ability to make that argument and take their bonuses with a straight face when the shit inevitably hits the fan.

It is a bit of a cliche at this point, but banking should be boring. From what I understand, the regulatory proposals being discussed don't go nearly far enough in achieving the obvious goal. But maybe, the SEC can start picking the slack.