Goldman Sachs and the SEC

It is not clear that the Securities and Exchange Commission (SEC) will prevail in the law suit that it recently filed against investment bank Goldman Sachs.

Certainly, if the case goes to trial, the SEC will need a lead attorney whose highest skill is to explain, in very simple terms, what Goldman Sachs actually did, why this is a civil fraud, and who was defrauded. All the while managing to prevent a majority of the jury from falling asleep within twenty minutes of arriving at the courthouse and taking their seats.

That will not be an easy task.

The twelve unfortunates, plus alternates, chosen for the Jury may be spared such an ordeal if Goldman settles. If there is a settlement, it will be because the disclosure of embarrassing and reputation destroying e-mails becomes too much for Goldman to endure. In that case the SEC will have won - but only by using blackmail rather than on the merits of the case.

Whether the SEC wins in court, or whether a settlement is reached, the SEC's actions appear to be a gross abuse of government power. There is no question that it is the job of governments to enforce the criminal laws. It is hard, however, to see the choice of a civil suit as anything other than a stratagem to avoid the requirement of criminal law that guilt be proved beyond a reasonable doubt.

If the buyers of the relevant financial instruments feel defrauded, let them sue. That they have not is highly suggestive: their reputations, too, would be on the line and their lawyers may well have reached the conclusion that the chances of winning, given their clients' stupidity and carelessness, are low.

None of the players had real assets in this game. All they did was to place very large bets on the direction that the value of certain real assets - owned by others - would take. One side wins, the other loses and the investment banker (casino operator) takes a fee for running the game.

In addition, Goldman appears to have rigged the roulette wheel (yes, it can be done), but even that was likely to have been disclosed in the prospectus. Were it not, a decent analyst should have been able to tease out the relevant information. More importantly, perhaps, no one forced the losers to place such unwise bets.

Goldman's actions appear slimy and unethical and the company undoubtedly deserves to be punished. If what they did is criminal, let criminal charges be filed: if what they did is civil fraud, let the losers sue, not the government. Otherwise, let the damage to Goldman's already tattered reputation take its own toll.

Those who lost money should have taken more care in their due diligence. Their analysis - or lack thereof - of the prospects for the American housing market, and the poor quality of mortgages supporting it, appears to have been entirely incompetent. Worse, they neglected the most basic principle of dealing with investment bankers:

READ THE FINE PRINT!

Your correspondent is unable to muster much sympathy for those who lost money as a result of their own stupidity and incompetence.

Enough said.