In one of the decade’s most important and complicated legal battles, the United States has charged Goldman Sachs, one of the foremost investment firms in the country, of civil fraud. Related allegations involve the firm’s actions engendering the recession that has adversely affected so many Americans’ lives.
What Goldman Sachs is accused of sounds like betting on the outcome of a baseball game — but with devastating effects on the U. S. economy. Robert Samuelson’s Newsweek article, “Goldman Sach’s Questionable Profit Motive,” summarizes the allegations well, when he writes, “In early 2007, at the request of a hedge fund run by John Paulson — not related to the former Treasury secretary — Goldman created a synthetic CDO (collateralized debt obligation), Abacus 2007-AC1. By its nature, this was not an investment security; it was an instrument for betting on the housing market. The synthetic CDO’s value was tied to a series of mortgage bonds. If the mortgage bonds declined, one set of investors (the “shorts”) would win; if the mortgage bonds strengthened, another set (the “longs”) would win.”
Samuelson writes that the United States alleges that Goldman Sachs committed fraud when it failed to disclose “to ACA or investors that Paulson would go short, the SEC says. That, alleges the SEC, represented the ‘material’ omission that defrauded investors. The mortgage bonds quickly lost value. Paulson made about $1 billion, the SEC said; other investors lost $1 billion.”
Their actions are complicated and there is more underlying business law and practices related to this issue, but the serious problem is that their ultimate motivations were to make a profit by trading risky assets, which runs contrary to sound practices of trading. What allowed this degradation to occur? Among other things, it was a lack of regulation.
And it is this perversion of their role on Wall Street from arbiters of capital that Samuelson defines as firms that “allocate society’s savings to productive uses” to a company that is motivated solely by profit — a perversion invading the business sector elsewhere, as well, not just in the failures of Goldman Sachs. And Goldman Sachs has not learned its lesson. MSNBC reports that “Goldman’s trading of risky assets once again generated the bulk of its profits. Revenue from trading of bonds, currencies and commodities rose 13 percent in the quarter to $7.39 billion.”
While Goldman Sachs is defending itself before Congress against the civil charges brought against them, the political side of this issue of regulating the business sector is brewing on Capitol Hill. The White House has proposed that there should be more regulation in Wall Street, in part to prevent the deception committed by Goldman Sachs and business decisions from crippling the world economy again.
“The SEC lawsuit represents an aggressive expansion of regulatory efforts to hold people and companies responsible for the nation’s financial crises. It could help the regulator rehabilitate its reputation after missing other high-profile cases, including Bernard Madoff’s Ponzi scheme,” Reuters reports.
However, the lawsuit itself seems to be a symbol of the change that is already occurring in the role of government in the business sector and a sign that the government is feeling the weight of responsibility for the health of the economy. Over the years, the economy has become an increasingly politicized entity. After all, politicians — whether or not it is deserved — answer to the American people for the economy each election cycle.
Just as bringing charges of fraud against Goldman Sachs has not checked their motivations to make profit their bottom line, which is easily seen in their recent profits gained through the continuation of their practice of trading risky assets, it will take more than a reform bill or a lawsuit to change the moral fiber of Wall Street. This change must either occur through rigorous oversight and heavy regulation or through a change of values within those who have made profit their ultimate objective, even if it means ripping off their fellow Americans.
The proper role of government in the business sector has been a contentious subject since the early 1900s, with the rise of the progressives. The debate has lasted 100 years, opinions oscillating based on the change in political power and political affairs on a worldwide platform — such as the fear of communism during the Cold War spanning the greater part of the 20th Century. But the lawsuit and the ideas within the reform bill are good places to start. My one hope is that the bill and the lawsuit are not corrupted by the obfuscation of facts, which only serves to dilute powerful legislation.