Goldman Sachs settles with the SEC and financial reform legislation passes Congress on the same day. Is this sadistic irony or are the wolves now in charge of the henhouse? Perhaps, it is time to pull out the “Godfather Trilogy” to view reality and fraud at work. “The higher I go, the more crooked it gets!” Al Pacino’s, ala Michael Corleone’s, salient assessment of human society in episode three may be more truth than fiction in this era of entitlement, free from accountability, with golden parachutes handed out freely to the ringleaders and perpetrators of massive financial fraud.
Financial prosecution at present seems to concentrate on punishing a single individual, rather than putting an entire executive management team in prison. Under this modern scenario, Bernie MaDoff is sent immediately to the stockade, and Joe Cassano, of AIG Financial Products fame, is free to pass “Go” and collect $300 million. Perhaps, the savings grace for public opinion polls is that Fabrice Tourre, perceived to be the “rogue trader” with damaging emails within Goldman, may be the sacrificial lamb for the “mistakes” of his firm. His lawsuit has not been settled, and Goldman has agreed to cooperate with the SEC in the “Fab’s” proceedings. As in the old Watergate days, Fabrice has been run up a pole and left to twist slowly in the wind.
Recent Senate hearings on the topic now appear almost farcical in their lack of follow through. Testimony by Goldman staffers was evasive and lacking in regret, yet fearful that a line may have been crossed. The more interesting comments came from outsiders. Economist James Galbraith attributed the debacle to a single word, fraud. He simply stated to members of the Senate subcommittee on crime, “Ask yourselves: Is it possible for mortgage originators, ratings agencies, underwriters, insurers and supervising agencies NOT to have known that the system of housing finance had become infested with fraud? Every statistical indicator of fraudulent practice –- growth and profitability –- suggests otherwise. Every examination of the record so far suggests otherwise. The very language in use: “liars’ loans,” “ninja loans,” “neutron loans,” and “toxic waste,” tells you that people knew. “
Many experts had questioned the validity of the SEC’s case against Goldman, admitting that evidence proving wrongdoing would be extremely difficult to assemble. These same pundits claimed that, after the spotlights dimmed, Goldman would quietly pay a small fee and continue on its way. Small may be in the eye of the beholder, but the SEC was quick to announce that their settlement with Goldman was the largest penalty of its kind in history. The firm will reform its business practices and pay over $550 million to the SEC. In 2009, the bonus pool at Goldman was $16.2 billion. Looks like execs may have to tighten their belts after this 3.4% haircut.
Goldman Sachs is a major international player with offices around the globe. Foreign currencies and managed forex accounts factor into the consolidation of its worldwide activities. As with currency risk, it must also deal with regulatory authorities in a host of countries that follow events in the U.S. before sharpening their own knives for the kill. British authorities have promised filings to come, and Europe may be close behind. Only time will tell if further settlements will arise to bite into executive bonuses. However, the incentive structure that encourages such greed and fraud seems to be left intact.
With its settlement completed and reform legislation watered down by its unrivaled network of lobbyists, Goldman Sachs is now free to continue down its own carefully designed road to prosperity. The greatest financial scandal since Enron is passing slowly into the history books with its most central figure receiving a laughingly small penalty for its handiwork. Perhaps, their payment of “protection money” was an offer the SEC could not refuse.