Goldman Suit Exposes Big Banks to Legal Firestorm

By Rick Ackerman, Rick’s Picks

Now we learn that the SEC split 3-2 over whether to go after Goldman Sachs in court. Supposedly, the regulatory agency prefers unanimous votes when bringing enforcement actions against the firms it regulates. Why the exception this time?  The Wall Street Journal made it sound like it was simply partisan politics that carried the day – i.e., the SEC’s two Republicans voted against suing Goldman for civil fraud, but the three Democrats prevailed. That is superficially what happened, and it is as much of the story as the SEC is willing to divulge right now. But it’s bound to leave many observers, particularly Obama-ites in Congress who are out to pillory the bankers, with the impression that the two Republicans were merely looking out for their fat-cat buddies on Wall Street. This thought occurred to us as well, so we’d have to concede it is at least possible.

But might there have been another reason why the Republicans backed away from bringing formal charges against Goldman?  We think there is and that it goes to the heart of the corruption in which the world’s largest banks have inextricably trapped themselves. For if you assert in a of court law that Goldman defrauded its customers, you have implicated every bank in the big leagues. Enabled by their respective central banks to create loans from thin air, every one of them – even banks run by otherwise spotless Swiss Burghers — have played the same Ponzi game as Goldman.  Now, regardless of whether the charges brought against Goldman are civil or criminal, they will open the door to an endless flood of litigation with the potential to bring down the entire banking system.  From this point forward, Goldman will be fair game for every aggrieved city, county, state, sovereign fund and class of investor with whom Goldman has done business during the last decade.  The same goes for Bank of America, J.P. Morgan, Morgan Stanley, Deutsche Bank et al.

Lynch Mob

So it’s just possible the Republicans put politics aside when they voted, in effect, to quietly sanction Goldman behind the scenes. It must also have occurred to them that it would ultimately be impossible to mask the overwhelming stench of Goldman’s actions. The firm, after all, did sell an investment to the public that had been furtively created by someone betting on the portfolio to fail. There is no way Goldman can talk its way out of this one, although that hasn’t stopped CEO Lloyd Blankfein from trying. With Goldman reporting a spectacular $3.4 billion quarter yesterday, he might as well have tried to explain to a lynch mob that he has never, ever kicked his cat and that he always helps little old ladies cross the street.

Some see the charge of civil, as opposed to criminal, fraud as reflecting a compromise engineered by Mr. Obama to help expedite his takeover of the financial sector. “He stirs up the masses with yet another example of Wall Street greed and fraud,” wrote one contributor to the Rick’s Picks forum, “but offers nothing more than what amounts to a fine to his friends at Goldman. We all know how deep their pockets are. They are quietly happy that this is the extent of the fallout.” While this seems plausible, it doesn’t reckon with the fact that just one civil suit is capable of triggering a chain of events that could conceivably put the world’s largest banks in mortal jeopardy for years to come.  If they should somehow dodge the bullet, it would be evidence that the corruption that permeates the banking system has engulfed our judicial and political systems as well.

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© Rick Ackerman and Rick’s Picks, 2010.