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.
News and Related Story Links:
- Money Morning Capital Waves Strategy Story:
How Capital Waves Are Creating the Biggest Profit Opportunities in Today's Markets.
How to Stop Greedy Banks From Killing U.S. Capitalism.
- Securities and Exchange Commission:
Official Web Site.
President Barack Obama.
- The New York Times:
TimesCast: Obama's Speech at Cooper Union.
Obama to call bank reform a 'just cause:' Geithner.
Collateralized Debt Obligations.
- Derivative Dribble:
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.