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Defenders of Goldman Sachs Group Inc. (NYSE: GS) say the civil fraud charges the U.S. Securities and Exchange Commission has levied against the investment-banking giant are without foundation, and are politically timed to push President Barack Obama's bank-reform agenda.
In his Cooper Union speech to Wall Street and the American public yesterday (Thursday), President Obama took pointed aim at opponents of his bank-reform agenda by stating: "Unless your products depend on bilking people, there's little to fear from these reforms."
Whether or not the timing of the Goldman Sachs fraud case was politically motivated, or whether or not President Obama was referring to Goldman with his "bilking" comment, one thing is for sure: The president and his administration are taking the reform fight to the Street.
An Insider's View of the Federal Fraud Case
Was Goldman Sachs made a sacrificial lamb on the altar of bank reform?
Based on the legal merits of the civil fraud charges levied by the SEC against Goldman Sachs, the government's case is unlikely to succeed, according to several prominent securities attorneys I spoke with, as well as several more whose commentaries I read.
Maybe Goldman Sachs was operating within the boundaries of the laws and regulations that were in force at the time when it created and sold a "toxic pool" of synthetic collateralized debt obligations (CDOs) to sophisticated investors, who were making their own bet that they were smarter than those who were betting against them. It's going to be hard for the government to argue that the buyers of these custom-made, packaged products didn't know that anyone else was taking a short position against them. That's how these instruments work.
Everyone knew that.
Maybe we'll find out that there was more to the charged deception than the SEC's case now reveals. Then again, maybe not.
But what may be most revealing about the charges levied against Goldman is that they evoked a worldwide response - anger - and will give the Obama administration's bank-reform efforts a greater chance of being debated openly - and a better chance of being enacted.
Who's Afraid of Bank Reform?
I am a former Wall Street executive, a former hedge-fund manager, and I now run a private-equity firm - so I am a banker.
But I am not afraid of any of the proposed bank reforms.
In fact, I am in favor and heartily support all of them. They make sense, they protect the American people, and they do not encroach upon my ability to make money in any way shape or form. And that's true of any moneymaking efforts that are based on honest hard work.
The unvarnished reality is that Wall Street needs to be cleaned up. And although the process and adjustments that will have to be made by banks to pending reforms will take time and be disruptive, a good spring cleaning will boost both the American economy as well as its financial markets.
Once again, opponents of reform are arguing that the extensive legislation being considered is too cumbersome and will undermine the free-market system that created America's stalwart banking giants.
And while it would be hard to enact comprehensive and prudent bank reform legislation without extensive paperwork, the basic reforms being pushed are straightforward enough.
The proposed reforms would:
- Give government the power to dismantle "too-big-to-fail" companies.
- Force derivatives trading onto exchanges, making the trading more transparent.
- Divest commercial banks of their proprietary trading arms (the Volcker rule).
- Create a consumer protection agency.
- Better empower shareholders by giving them "more say on pay," as well as input on compensation incentives.
These reforms have been on the table for more than a year. The House has passed some of these measures in its bill. Now the Senate has to take up reform legislation and do its job.
By taking on Goldman - and doing so in full view of the public - the Obama administration has hopefully forced the bank coddlers and protectionists out of hiding, and into the light of day. The initial glare will be on the Senate and its deliberations. If the Senate enacts the full scope of what's in the public interest, the House is already on notice that it may be getting its bill back for some changes.
I've said this to Money Morning readers many times before ... but now I will say it differently. Anyone who uses political arguments to defend the tyranny of the bankers is party to their bilking of all of us.
Admittedly, I have often been called Dr. Doom-and-Gloom for my negative outlook on the economy - and for my hesitation to trust the current stock-market rally - even though I have participated in it. There's a lot of money on the sidelines, including some of mine.
If we get all the slated reforms enacted, I'm all in.
With essential bank reform enacted, America will once again be the envy of the world. Our economy will flourish and our stock market will rise on an ever-higher-and-stronger footing.
It's time to stand up and make certain that you are heard. Write, call and e-mail your congressional representatives: Let them know that you stand for - and are standing up for - bank reform.
[Editor's Note: Money Morning Contributing Editor R. Shah Gilani has seen it all - which is why his columns and analyses have been read by millions.
A retired hedge-fund manager and gifted analyst, Gilani regularly readers behind Wall Street's "velvet rope" - and into the world he knows so well - exposing the pitfalls that can inoculate investors against ruinous losses even as he highlights profit opportunities that most other experts never even recognize.
With his new advisory service - The Capital Wave Forecast - Gilani shows investors the monster "capital waves" now forming, will demonstrate how to profit from every one, and will make sure to highlight the market pitfalls that all too often sweep investors away.
Take a moment to check out Gilani's capital-wave-investing strategy - and the profit opportunities that he's watching as a result.]
News and Related Story Links:
- Money Morning Capital Waves Strategy Story:
How Capital Waves Are Creating the Biggest Profit Opportunities in Today's Markets. - Commentary:
How to Stop Greedy Banks From Killing U.S. Capitalism. - Securities and Exchange Commission:
Official Web Site. - WhiteHouse.gov:
President Barack Obama. - The New York Times:
TimesCast: Obama's Speech at Cooper Union. - MarketWatch.com:
Obama to call bank reform a 'just cause:' Geithner. - Wikipedia:
Toxic Assets. - Wikipedia:
Collateralized Debt Obligations. - Derivative Dribble:
Synthetic Derivatives. - Wikipedia:
Too Big to fail. - Baltimore Sun Financial Columnist Jay Hancock:
Obama wants Volcker rule, fudges on consumer agency. - U.S. Treasury Department:
Fact Sheet on Say on Pay.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.
I think there is some reform to do. But I do have a few big questions: What is the actual purpose of the SEC? Isn't it supposed to be a consumer protection agency? Also in giving the government the right to break up "too-big-to-fail" companies: Is this really just limited to banks? Right now, we have a maniacal President who is trying to place as much of our country under his direct control, and mega-maniacs in Congress who want to help him. Besides, the government has shown what it can do when it runs institutions like Fannie Mae and Freddie Mac. And I also understand that there would be created another fund to prevent bailouts in the future? How does that make sense? And if so, why? What would happen to FDIC? Would the government actually eliminate a broken program, only to replace it with another similar fraud? I would be interested in your responses to these questions, Mr. Gilani.
Reply to Kevin Beck | April 23, 2010
I am a reader of Shar Gilani whose advice I value. However, I agree with you
Mr. Beck, and I am fearful that whatever the government will do, will make it even worse. Perhaps the motivation for this Banking Reform goes back to L.B. Johnson's statement "The reason a politician gives you for why he so voted, is
definitely not the reason, he so voted." I am very cautious in buying anything and follow the adage "Buyer Beware." Just about the whole world bought the
Toxic Waste, which is nothing more than worthless junk, not worth the paper it was written on, but it rated Triple AAA Bonds Status, and these foreign and domestic "Investors" should have known better. They could take the sellers to court and try to retrieve some of the lost money, but they should learn that even if the USA government seems to approve these goods, it means nothing.
The Buyer should earn his money and do his own research and if the data from provided sources is incomprehensible, it is probably a book of deceit. In short,
the market will correct itself. The quote from above is as follows"
The unvarnished reality is that Wall Street needs to be cleaned up. And although the process and adjustments that will have to be made by banks to pending reforms will take time and be disruptive, a good spring cleaning will boost both the American economy as well as its financial markets." However,
"A Thief is always a thief. A Leopard does not lose its spots." TIME WILL TELL WHEN WE CAN DEAL WITH THEM AGAIN. Just because the Government will bless the financial markets, does not make them Holy again. However, if I read Mr. Gilani's statement over and over again, he seems to be saying that Wall Street needs to be cleaned up, and I agree, and it will take time, and I agree and any one who has been burned will remember for a long time. I was not burned but I saw it coming as I also read other peoples statements about these strange "Toxic Wastes" . "A good spring cleaning will boost both the American economy as well as its financial markets." is another part of Mr. Gilani's statement but he did not say who would really do it or should do it. The government has RICO if it wants to use it. They have all the laws they need if they want to do something, which I doubt they will do. Time will tell. Consumers who have been burned will be more cautious and should invest after taking the time to study the material available. Check out everything yourself. TRUST IS EARNED.
Dr. Roger Voelker
Are we at all concerned about giving the executive branch unbridaled authority to "unwind" banks without congressional input?
Does the author really believe that the legislation proposed by Obama is really for Bank reform? This administration is interested in power, control, money. Don't fall for talk of reform to benefit the country. Remember health care was passed to improve our health care system. Sure! Sad commentary. Wise up!!!!!!
Joe
How do you know Joe??? Arn't you being a little presumptious. Give it a chance.
Mr. Gilani may be a super-experienced hedge-fund manager, but so was Goldman Sachs. Unfortunately he is also a dyed-in-the-wool Keynesian, which is betrayed by his stated belief that banks having lots of money to lend makes for economic prosperity. If you believe this, then, by all means, jump back into this market.
My degree is in economics (Tulane U.), and I was only a reasonably successful stockbroker with E.F. Hutton (retired at 29, bought 52' ketch and sailed around the Caribbean for 5 years), during a time when the stock market went essentially sideways. I accomplished this without defrauding any of my customers.
My advice? Study the Austrian School of economics, and avoid like the plague the advice of any "economist" who has won a Nobel Prize in it. The Nobel Prizes are a sham, serving only to seem to validate the opinions of those chosen by the elites to bring the rest of us to destruction, while profiting on our demise.
Got physical silver? 90% junk coins? No? Time is running out.
You have got to be kidding! Giving government the "power" to dismantle "too-big-to-fail" companies? They did not use this "power" to stop Freddie & Fannie, and in fact encouraged the sub-prime mess! This reform bill is nothing more then Goldman, the Congress, and Obama to create more regulation! For such a smart guy your support of this bill is really stupid!
Peter Schiff hates this bill, and so do I! It is another power grab by the government in the guise of trying to protect “the small guy!” (How condescending)! All this does is to shift the tyranny from big banks to big government! Or more likely it is the Tyranny of big banks in collaboration with big government!
Regulation is needed but not in the form of this bill!
The bill is a bureaucrat's dream. A financial Caesar who determines who lives or dies without congressional oversight. In the name of the consumer a new bureauracy with rules to kill angel financing and entrepreneurs. We should re introduce risk of failure for reality and apply exisiting authority of the SEC. There has to be a better way than this.
Obama has only one goal, his socialist agenda. I ask you what has he done that works? stimulus, bailouts, foreign policy, jobs bill, healthcare, cap and tax, all these are a disaster!!!!!!!!!!!! And they push for more cause there time is running out, hurry November so we can dump all these politicans. Obama does not tell the truth, the 50 billion slush fund in this is only a way to pay back his contributiors.
More graff, corruption, more power, more taxes, more lies and all for you the American people!
YEAH RIGHT!!!!!!!!!!
It is all about risk and reward. Not a single one of the Investment firms had the power to force anyone to participate. Each and every investor that lost money did so with the full knowledge that any investing in the Market carries a risk. The losers are now crying foul because they failed to fully evaluate what they were buying.
Why do we want the Federal Government with tyrannical power to take over the free market? Unlike the investment firms, the Federal Government as the power to Force citizens and firms to do as they wish. With the bailouts the Government has forced the taxpayer to invest high risk adventures–GM, Chrysler, AIG, etc. The Government has force citizens to invest in Social Security and Medicare.
I prefer to have the liberty to invest as I chose, not as the Government decides.
Stop the tyranny of Big Government. I'd rather have the voluntary participation. Let the Market decide the winners and losers–not Big Government!
If there is no regulation of the banks we will find ourselves in a worse mess in the near future. Those folks screaming about socialism can't have it both ways, i.e privatise profits, socialise losses which has been the case when this mess started.
Incidentally, why is it that the Canadian banks are in such excellent shape? Why has there never been a bank failure since the country was founded in 1867? Could it possibly be that they are regulated? Oh but then I forgot the Glen Becks and Rush Limbaughs of the world claim Canada is a communist peoples republic.
Unfortunately the majority of US voters believe swallow the bile these right wingers put out.
Canada is very likely nice dream for people tired of US nightmares.
Greed of big banks and their lobbists created all mess. There is nothing else, then very inventive, greed-driven approach to do as much as possible to milk anyone on the planet.
Someone would anyway need to stop it. Obama or non-Obama what the difference.
It is total cancer in terminal stage for US.
Open your eyes, before commenting that total bank-reform will kill economy, the economy is already dead, by the way. By all fair standards.
Does the provision allowing the Feds to track every single financial transaction in the country and create a huge federal database bother anyone or was it just George Bush tracking potential terrorist activity that scares you? I find it telling that Glass Stegal which apparently worked for quite a while may was repealed for being outdated after being in effect for many years was written in four pages but this monstrosity is 1300+. It must be Obama's staff is more eloguent.
It has gotten to the point of when the government speaks, I question! Believe nothing that comes out of Washington. The bill is a joke that creates a bunch of bs regulations that will fail if they are ever needed because the banks will get around them. Vote them all out! We need by the people, for the people! I am ashamed of our so called leaders.
Yes we need Bank regulation & derivatives control. Goldman Sachs, JP Morgan, Bank of America,
HSBC, US Govt entities & the Fed are are conspiring Hand in Glove as one entity. What we need is separation of Bank & State. Consolidated World Banking interests control most socialist Governments worldwide. Do your homework. Canada is a socialist country and has not had a Bank failure. Neither have Communist China or North Korea. There Govt. Beauracracts tell the Banks which businesses succeed or fail. We need strong uniform STATE regulation of Banking because of federal corruption, collectivisim & steam rolling to a controlled socialist state.
The Federal Reserve Bank (just an arm of these One World Banking interests) would have a harder time controlling & corrupting each State.
Arguing about bankiong reform in absence of Congressional and Presidential reform is just asking for more nationalization. This line you are spouting is wrong and very dangerous to the health of this country in my opinion. Therefore please remove my email from your distribution lists at this and all other sectors of your company. Thank you.
It's comical to see how critics of another government power grab are painted as "wanting no regulation." The power of the media is truly amazing in it's ability to mold otherwise sensible people into tooled masses.
And now it's becoming quite clear to me why Mr Gilani relies so much on skillful copywriters to market his wares instead of objective, historical evidence. His omission of even acknowledging, let alone examining the relevant points of those opposed to THIS version of reform is also very revealing. There is a reason that the head of Government Saks visited the White House frequently prior to the announcement of the lawsuit against his firm. The entire thing will go nowhere, by design. The ONLY reason for the suit is to further dupe average Americans into believing Obama opposes the Wall Street elite when the truth is anything but. As long as the media are in bed with him he could convince the masses to do anything and believe anything.
Now bend over folks the Government has some redistributing to conduct.
Why were banks allowed to do more than banking in the first place. Investment firms, should be investment firms, Insurance companies, should sell insurance, and banks should do banking and only banking. It does not make any sense to alllow gamblers into any of these businesses, everytime I see (making a bet, a wager, etc.) in an article about one of the institutions that deal in a security it gives me chills. A firm dealing in securities should never be in the business of gambling, and these days they all seem to be doing just that, "GAMBILING" and they are not just gambling with their money and rescourse but with all of our rescources, and it should be stopped cold.
We all agree our financial system is broken and in need of repair? President Obama and Congress are focussed on core issues disrupting our financial sector: reining in greedy Wall Street bankers who wield too much power excessively favorable to themselves at main street's expense. Until corrections are made, our current financial system will fail and massive disruptions will occur again, and next time it will be worse than what we have just experienced because the US, already weakened by heavy debts trying to get out of our current malaise, will probably not be able to survive and remain the leading world economic power by engaging itself in another round of bail-outs and going into even deeper debt. What is going on in financial reform is survival. The US cannot have a strong economy with a dysfunctional financial system. It is a road to disaster.
Forget labels like socialistic agenda. Just get the job done, whatever it takes.
Question : Mr Gilani are you relative to Mr Gilani minister in PPP government with Benasir Butto in Pakistan.
Regards
Gottfried Schmidt.
I just want to know that the goverment borrowed from meis going to get paid back as promised. The tarp money was borrowed from us the "we the people" where is our money, and what have they done with the payback. goldman caschs say what you say but it's a fraud
hanyone been watching the last 9 years damage already done why suddenly watching you voted for sarah palin didnt you