One wonders about the real purpose for this week's Congressional hearings about the alleged misdeeds of Goldman Sachs. Taken at their worst, they amount to claims that the firm failed to disclose to buyers (all in the securities business) of mortgage-backed securities issued by it, all material information concerning their origin and character. Whether or not this is true, the national implications - i.e. rationale for Congressional involvement - are doubtful. The same can be said for the SEC civil suit.
If anything, this is a private matter between Goldman and its customers, for which customary civil claims under the securities laws would suffice. Securities law experts are divided as to whether disclosure of the involvement of John Paulson - a noted bear regarding the housing market - in the structuring of the securities was legally required. While the author, a corporate attorney having some experience in securities law, would have advised Goldman to disclose such information to avoid this sort of second-guessing, this is beside the point. The point is that if these investors believe that they were defrauded, they can sue or arbitrate under existing law for recission of the transaction (refund) or other damages. Such claims by the sort of indisputably sophisticated investors who are involved here, are commonplace, and the firm is obviously capable of satisfying any judgment which is awarded. This is not a Madoff situation where victims of a fraud have no redress and involvement of the SEC or Congress is needed.
The spectacle of Senators and commentators so vehemently denouncing Goldman's business practices, as though they caused the Great Recession, is unseemly and absurd. Whatever it thinks of the business practices of Goldman or any other private company, Congress should not be involved in private disputes, absent some broad-based implications for Americans in general. That is, whether the practices at issue are causing loss to consumers in general.
Despite the superficial attempts in the Senate to tie Goldman and other investment banks to the economic downturn, this is simply not the case. They had little or nothing to do with the ultimate cause, namely the origination of low quality mortgage and other debt which could not be repaid. Once such debt had been incurred, losses were inevitable and the only question was how such losses would be allocated. Whether they were to be borne by Goldman, John Paulson, Goldman investors or someone else, had nothing to do with macroeconomic consequences. These investors have the resources, incentives and knowledge to fend for themselves.
This is also not a case where proposed legal reforms are at issue. All agree that existing securities law bars material misstatements and omissions of material facts. The issues in this case are strictly factual - i.e. was the information about the manner in which the securities were structured genuinely material to the investors. As Goldman points out, such materiality must be judged by reference to all of the circumstances which existed at the time of the transaction, including its role as a market-maker, which inherently means that a transaction requires parties to have opposite views about the valuation of the securities.
These hearings and the SEC action are nothing more than a naked political ploy to rally support for the Administration's so-called "financial reform" efforts by demonizing Wall Street and big business. This is not a case of Congress and the SEC looking out for the "little guy" who can not look out for himself. It is simply a cynical effort to cause the unsophisticated public to look for bogeymen to blame for all of our economic dislocation. Even assuming the worst about Goldman's business practices vis a vis its clients, they are not the cause of our problems. They are strictly a private matter.
We would be much better served if rather than take sides in private disputes, Congress and the SEC would look in the proverbial mirror and consider their own actions in cases such as extreme, unwarranted encouragement of homeownership through Fannie and Freddie (and their campaign contributions) and the Community Reinvestment Act and ignoring express warnings about Madoff and Stanford.
The author is a (small) securityholder in Goldman Sachs.