06/20/2010 05:12 am ET | Updated May 25, 2011

Goldman Sachs Fraud Suit: The Populist Veneer

Allow me to be the latest in a long line of people who note that the SEC's recent fraud lawsuit against Goldman Sachs sure seems like a fortuitous coincidence in the life of financial regulatory reform efforts, n'est-ce pas? And can I add that I do not believe that there are such things as coincidences? Okay, so: there you go.

Lord knows that I don't want to be discouraging of the chances that some lawmaker, somewhere in America, might at some point deliver a plan that will prevent the sorts of financial chicanery that built unsustainable bubbles out of crapulent mortgage derivatives and nearly destroyed the economy. And yes, the tiny, ichorous lizard that lives in my black heart wants nothing more than for someone to extract a pound of flesh from Goldman Sachs. But it seems to be pretty clear that what's happening is that the White House is constructing a big goddamn pageant play with noble heroes and wicked villains. And at the end of the day, something called "reform" gets passed while everyone is looking at the shiny optics and nobody asks "Well, will this work?" and before you know it, it's passed and the world moves on and maybe it's effective, but maybe it isn't.

The coincidental nature of the SEC suit sure helps to enable this. And hey, nobody could have predicted that this would be the week that Goldman announced its latest round of gaudy bonuses, right? Surely not.

You want caution? Over at The Awl, Choire Sicha warns that the SEC investigation is "a joke":

The lawsuit "seemed to confirm many Americans' worst suspicions about Wall Street," [The New York Times] wrote, which is true, if you consider that the sentence hinged on "seemed," as no American understands the complaint....Much of what follows in the Times piece is speculation on the idea of there being possible future lawsuits by other bank-customers of Goldman, and on the growing political machinations for regulation in a completely unregulated market. (Which, great! Looking forward to that.) The SEC lawsuit "raises new questions"! (Questions not really new or raised.) The stakes "couldn't be higher"! (Oh but they could.) Goldman's success is "controversial"!

The success is not, particularly, controversial. It is if you are playing perception politics.

The best part of Sicha's rant is his warning that maybe it's straight up improper to think of this suit as something that's akin to the SEC sticking up for "the little guy":

What's even worse about these stories is the confusion about who is an "investor." That word gets bandied about quite a bit, and never, in this case, does it mean "people who buy stocks" or "people who are not members of billion-dollar commercial entities." The game? It "is rigged, the odds stacked in the banks' favor." But, but... the game is entirely composed of banks. The game is always in "the banks' favor." There are no non-banks involved!


The poor uninformed investor! Main Street! Who was the investor so taken advantage of in the SEC charge? IKB Deutsche Industriebank AG -- an immense bank, with nearly 2000 employees, that so wholeheartedly bought in to the subprime fad that it had to be bailed out twice.

I think this is important to keep in mind, because -- at the risk of getting a citation from the False Equivalence Police -- I'm pretty sure that in some back room, some Democratic strategist -- we'll call him "Lank Fruntz!" -- is busy telling his charges that this Goldman suit is the means by which they will prove their populist bona fides. The game is high-toned Tea Party politics, and someone has got to get tagged with a Hitler mustache.

And why Goldman? Well, why not, if it's going to give that tiny, ichorous lizard that lives in my black heart a tiny, ichorous lizard orgasm? And you know what that tiny, ichorous lizard that lives in my black heart is uniquely attuned to? The base politics of brand reputation. And as Moe Tkacik points out over at Daily Finance, this is nothing if not a pitched battle of branding:

Well, there's a thing called "branding" in this country. It's apparently the only thing the public responds to anymore. So: Obama got elected because he had a good brand, his happy marriage to Michelle is a function of his larger brand strategy, he passed health care reform at a great risk to his brand, etc, etc.

So, the same way the Obamas and the Kardashians and Apple are all brands, Goldman Sachs is a brand. If you're on Wall Street, it absolutely goes without saying you've got acute Goldman envy. You'll pimp your own daughter to beat its earnings. You'll quadruple the salary of any of its genius junior traders willing to work for you -- and guarantee him a minimum $8 million bonus -- and then that trader will spill all your secrets to his buddies back at Goldman Sachs and you can't even get mad at him, it's just a testament to how great they are over there at instilling loyalty to the goddamn Goldman brand.

Meanwhile on Main Street, Goldman is to Wall Street as Abu Ghraib is to the military. So many bad apples! Goldman is the firm that brought you Hank Paulson, the guy who forked over a trillion dollars so bankers could take home $33 billion in bonuses in a year unemployment hit 10%. Then there's his heroically loathsome deputy Neel Kashkari, who pressed Paulson to start paying attention to the mortgage crisis only by deploying the profoundly warped analogy of the Iran hostage crisis, wherein if they failed to act to stave off the destruction wrought by Bush Administration plutonomics, Obama would be the guy who got credit for actually doing something about it (as Ronald Reagan was credited with bringing home the hostages).

As Tkacik also points out, as foul as the fraud that went down between Goldman Sachs and John Paulson's (remember, no blood relation to Hank Paulson) hedge fund was, it pales in comparison to the scheme from which John Paulson drew his inspiration: the subprime shenanigans of Magnetar. (Paulson bought $5 billion worth of equity tranches of toxic CDO sludge, compared to the $40 billion that Magnetar slung.) And yet, you don't hear the White House bleating a blessed word about Magnetar, do you? That's because there's a wee bit of a branding problem, don't you know! Here's Yves Smith, writing on these pages, last week:

In 2005, Magnetar started giving to Rahm and his PACs, and only PACs connected to Rahm, just before the Magnetar CDO program began, and continued through the first quarter of 2008, when the trade would have started to pay out handsomely. The Litowitzs [Alec Litowitz runs Magnetar] gave a total of $8,000 to Emanuel and $10,000 to his Our Common Values PAC in May 2005. In 2006 and 2007, they contributed $51,700 to the Democratic Congressional Campaign Committee, while Emanuel was chairman. We have been advised by individuals involved in political fundraising that the amounts given would be considered significant, and the way the payments were distributed across the PACs is sophisticated. Put it another way: this money was not given impersonally.

But this troubling connection should be no surprise. Rahm has long been a favorite of the hedge funds, having raised more money from them than any Senator not running for President. Not surprisingly, he has been a staunch supporter of the financial services industry, and is widely credited with playing a key role in securing passage of the TARP after its initial defeat.

So that's the score, y'all. (Do I really even need to remind you all that Goldman Sachs was one of Barack Obama's top campaign donors, second only to the University of California PAC and employees? And that they gave Obama four times the amount of money as they did John McCain? And that since 1989, Goldman has favored Democrats over Republicans in terms of campaign donations? Okay: done and done.)

But hey, at least we have the financial regulatory reform bill! Surely it may play a role in preventing this sort of scheme from happening again, right? As Tim Fernholz pointed out yesterday, there remains reason to hope. But as I pointed out yesterday, the FinReg battle has devolved into the usual battle for bipartisanship, and typically, as legislation heads towards bipartisanship, it gets watered down. Bipartisanship sauce is Washington's most treasured commodity -- the press will allow entire life-giving forests of public policy to be napalmed into ash in pursuit of this Unobtanium. Besides, I'm pretty sure the Democrats will be just fine losing the Senate vote on FinReg if they still get to parade as populist vigilantes come election time.

But what of Goldman Sachs, the ostensible target of this white-eyed vigilantism? Will this SEC suit be the thing that defangs the great vampire squid? I wouldn't count on it. I unleashed a spasm of chortling when I heard that someone said that now investors will think twice about getting into bed with Goldman. Puh-lease. Goldman's been stacking tall dollars for its investors pretty reliably, and besides, everyone knows that the safest time to fly commercial is right after a disaster.

And anyway, surely Lloyd Blankfein understands that he can't succeed in "doing God's work" without risking being on the wrong side of a little light crucifixion. I feel pretty certain -- cynical, even! -- that at some point, after the fever has died down on the SEC suit, Goldman will be the beneficiary of some future, underreported "make-up call." It stands to reason: Goldman doesn't pay all those lobbyists all that money (that we gave them, through TARP!) to just sit there and take it backwards up their alimentary canal.

And, look, even if that doesn't come to pass, let's remember: Goldman paid out $16 billion in total compensation in 2009. In a post-Citizens United environment, that kind of money buys a lot of "free speech."

The Goldman Sachs SEC Investigation Is A Joke [The Awl]
Goldman vs. Magnetar: A Dozen Questions About the Subprime Scandals [Daily Finance]

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