Goldman Sachs (GS), one of the financial powerhouses of Wall Street and the City and an active shadow soft power around the globe, was accused this month of securities fraud in a civil suit filed by the Securities and Exchange Commission (SEC).
The alleged fraud was one of the financial vehicles created by GS so the bank and select top clients, like hedge funds managers, could bet against the housing market, capitalizing on its panic and collapse, against the very interests of GS customers that bought the mortgage investments. The code name was “Abacus 2007-AC”, a CDO (synthetic collateralized debt obligation) – a parcel of sub-prime mortgages. Fabrice Tourre, a French-born, vice–president of GS, was also suited as the 31-one-year old genius behind the financial trick. He was named “the fabulous Fab”.
We asked David Caploe, Chief Political Economist of EconomyWatch.com, a blog based in Singapore, to comment on this first move from American regulators against a Wall Street deal. His message is simple: the news about the fall of the House of GS probably are exaggerated, so far. May be this episode is basically a symbolic strike to press the “fat cats”, as president Obama recently named Wall Street bosses in his campaign for financial reform.
Fast Interview by Jorge Nascimento Rodrigues (c) 2010
Q: In the beginning of the financialization wave in the US we had J.P.Morgan himself as the “boss” and the House of JPMorgan later. Then in the 1970s and 1980s we had Citicorp (relabeled later Citigroup). After the financial innovation revolution it emerges Goldman Sachs (GS), and later in the 1990s and 2000s everybody talked about “government Sachs”. Do you think the SEC vs. GS Abacus fraud, after the Greek affair engineered by GS in Athens with the former Karamanlis government, can be the beginning of the end of this financial “empire”?
A: As you know from my two pieces this week, here, and here, I am EXTREMELY skeptical of what SEC v Goldman actually means.There are just too many unanswered questions and uncertainties about the whole situation, such as: 1) Why did the SEC bring a legal case that almost all observers agree is so weak ?; 2) Will the case actually even come to trial, given how long it takes for ANY legal proceeding to go through the US judicial system — or will, after a certain period of time, there be some kind of settlement that will enable all concerned to claim “victory” ?; 3) Did the fact that the US Senate is now considering a “financial reform” bill — which, as you know, we don’t think is very strong at all — have anything to do with the timing of the announcement ?; 4) If so, will the whole situation somehow “be resolved” once the legislation — in whatever form it finally takes — be passed ?; finally, 5) All during the Cheney / Bush years, the SEC was Wall Street’s lapdog. Admittedly, they are under “new management”, but will the new team actually follow through — or is this just a “symbolic” strike to “scare” Wall Street into acting a BIT more responsibly ? And these are only the most immediate questions / uncertainties surrounding the situation.
Q: But can we expect the fall of the House of GS?
A: It’s certainly true that GS was deeply involved in the disaster of Greece, and the looming problems in Italy – but I have no sense at all they are very worried by their past actions in Europe, all of which WERE, after all, “legal” in the most strict sense, no matter how problematic they were from an economic and ethical point of view. And, this case aside, GS’ stock price hasn’t gone down very far at all, at least so far, so I think we are a LONG way from seeing the collapse of the Goldman Sachs empire — let alone the collapse of the entire Wall Street empire. BOTH of them remain VERY strong financially — until, of course, they are forced to “mark to market” all their “toxic assets”. But their political power in Washington remains EQUALLY strong, especially given the insane US “Supreme” Court decision that allows corporations to spend an UNLIMITED amount of money to influence all kinds of political activity, not just elections but also legislation.
Q: Can we risk a tsunami at Wall Street? And at the City in London? Or it’s more of the same, more vaporware than real reengineering of the financial shadow system?
A: Well, again, I don’t think we’re near anything like a tsunami on either Wall Street OR the City — except, of course, the kind they inflicted on themselves and the rest of the world with their own irresponsible actions — eg, Lehman’s Repo 105 — that resulted first in the Black September meltdown, and then, when they wanted to make sure they were protected by taxpayers from their OWN mistakes, the ensuing LENDING FREEZE that has resulted in a recession first in the US, and then — because we have a US-centered global political economy — the rest of the world. The idea that the enforcement of serious regulation could cause the collapse of either Wall Street or the City is merely corporate propaganda — an attempt to limit their own responsibility. And, as George Soros pointed out recently in the Financial Times, even the RELATIVELY strong measure on derivatives recently passed by the US Senate Agriculture committee — don’t ask why they (Agriculture Depart !!) are in charge of the most important instrument of the “global shadow banking / financial system” — is FAR from a complete regulation of all the dangers that can flow from derivatives.
Q: Who can profit from an eventual fall of the House of GS?
A: Well, like I said, I really don’t think GS is anywhere CLOSE to falling, so I wouldn’t prepare any obituaries yet. As far as who would benefit from a diminution of GS’ power, I think we’ve seen from how THEY and the rest of the remaining TBTF (too big too fail) banks carved up both Lehman Bros and Bear Stearns, that the IMMEDIATE beneficiaries of any such — again, most unlikely — happening are likely to be the REMAINING Wall Street firms. In the longer run, I think the beneficiaries of an ORDERLY and politically regulated diminution of both GS’ AND Wall Street’s power would be American taxpayers and everyone else in the world. But, again, I think we’re a LONG way from that happening.