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The SEC vs Goldman—to do right, do it right!

Finance Blogger: Anthony Harrington Anthony Harrington

Oh dear! If the SEC had only followed its own best practice when it decided to go after Goldman Sachs how much better things would now be. One could have given a small cheer that the SEC had finally wiped the mud out of its eyes and was now genuinely determined to act like the regulator it is supposed to be. Instead, sensing the opportunity to hog the headlines and strut its stuff in the limelight for a few brief hours, it threw caution to the winds and announced to the media in a grand manner that it was going after Goldman Sachs for fraud.

“And where’s the problem in that?” many will ask, since it is common knowledge that bankers in general were “at it” pre the crash and the common belief is that the bigger bankers were at it more than most—and they don’t come any bigger than Goldman Sachs.

The problem is that the SEC is not supposed to play politics, and when it does, it covers itself with anything but glory. A US analyst I was speaking to on the afternoon that the news broke immediately said: “Aha, that will be the Obama administration looking to get some steam up to push through the Dodd Finance Bill. Bash a banker and get popular. It won’t work!”

So what did the SEC do that was not “best practice”? The usual form is that when the SEC is going to proceed against a company or an individual, it contacts that company to make them aware of the pending case and its attorneys talk to their attorneys. The point is very well made by Henry Blodget in a Business Insider piece.

In the case of Goldman Sachs it was a case of “read it in the papers first, sucker…” So why did the SEC go direct to the press in this instance? The blindingly obvious reason appears to be that it wanted to ensure it hogged the headlines, wrong-footed Goldman and whipped up all that righteous anti-banker feeling out there to give itself some real momentum to take into the case. As Blodget points out:

“Yesterday, for more than an hour after the SEC filed its charges, the SEC had the headlines to itself. A short Goldman denial appeared around noon, and a longer, more compelling one appeared at the end of the day, when most people had already started checking out for the weekend. Thus, the SEC's fraud story dominated the headlines all day long.

Now, there are many reasons why the SEC might have chosen to act this way, all of which were understandable:

  • It looks tougher (everyone hates Wall Street these days, and the SEC has looked wimpy)

  • It looks pro-active (for once, the SEC is ahead of the game)

  • It does more damage (by the time people have time to examine the allegations in detail, most people have made up their minds about the accused's guilt).

Of itself, that is not a good way for a regulator to behave. The SEC’s own code, prescribed for it by Congress, requires that all its employees, from the highest to the lowest, “maintain unusually high standards of honesty, integrity, impartiality and conduct…”

Ironically, this quote comes from the report by the SEC’s inspector investigating the Commission’s handling of the Robert Stanford Alleged Ponzi Scheme [PDF, 982 KB]. Why ironically? Because, as Blodget points out, that same SEC inspector’s report was published on the same day as the SEC announced it was going after Goldman and effectively consigned any press attention to that report to oblivion. Blodget quotes a devastating Wall Street Journal comment on the report, one of the rare papers to cover the publication:

“The report by the SEC's inspector general says SEC examiners concluded four times between 1997 and 2004 that Mr. Stanford's businesses were fraudulent, but each time decided not to go further. It singles out the former head of the SEC's enforcement office in Fort Worth, Texas, accusing him of repeatedly quashing Stanford probes and then trying to represent Mr. Stanford as a lawyer in private practice.”

That would not have made happy reading for the SEC, and few media outlets have bothered to go back and resurrect the report. Goldman is so much more juicy a story. If the SEC wants to be a credible regulator it needs to stick rather more rigorously to its own code of conduct.

Further reading on US financial regulation

Tags: banking , Goldman Sachs , Ponzi scheme , regulation , SEC , subprime
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