Count me among those who were appalled by the news that the SEC's decision to charge Goldman Sachs with fraud last week was decided by a 3-2 split vote among the 5 SEC commissioners.
Fraud is a serious charge, even in a civil regulatory case. Fraud charges hurt shareholders, destroy reputations, and end careers. Having to settle fraud charges because it's the only way to stop horrific headlines is unfair. Alternatively, litigating fraud charges eats hundreds of millions of taxpayer and shareholder dollars that might be spent more productively elsewhere.
The assessment of whether fraud occurred, therefore, should not be so subjective that 2 out of the 5 SEC decision-makers disagree with it.
The assessment should also not depend on one's personal political perspective -- which, in this case, it appears to have. The 5 SEC commissioners voted along party lines. The 3 Democrats voted to charge (the head of the agency, Mary Schapiro, is registered as an independent, but she was appointed by President Obama). The 2 Republicans voted not to charge. If Goldman committed fraud, that should be evident from both sides of the aisle.
On Friday, when the SEC stunned Goldman and the world by finally breaking six months of silence with what Goldman deemed a "sucker-punch" of a press conference, the markets were justifiably rocked. The SEC's evidence and conclusion were presented in black and white: Goldman was guilty of intentional deception and fraud; it was time for justice.
The fraud charge quickly cost Goldman's shareholders $12 billion. It clobbered the world stock markets. Experts talked of a wave of similar charges that would (finally) impoverish Wall Street -- news that, off Wall Street, was met with nearly universal applause. Some observers wondered whether Goldman would even survive.
And then, three days later, we learned that the SEC's evidence against Goldman is apparently so un-persuasive that it did not even convince the 5 players on the home team that Goldman committed fraud.
Make no mistake: It's easy to make popular decisions, and this fraud charge was a wildly popular move. It represents a potentially huge boost to the SEC's reputation. After missing Madoff, Stanford, and the financial crisis, the SEC is in desperate need of a redeeming victory -- a fact that could not be lost on all 5 SEC commissioners. It is in every commissioner's professional interest, as well as the interests of the agency, to bring this charge and see it through. And yet, despite this huge incentive to move forward, 40% of the SEC decision-makers decided the charge was unwarranted.
In light of that, moving forward with the charge just feels wrong.
This country needs tough, fair-minded financial regulation that doesn't have anything to do with politics. It needs clarity -- of rules, execution, and purpose. It needs consistent, even-handed enforcement, regardless of the political environment and national mood. And it needs it now.
Above all else, THAT should be the goal of financial reform.
Don't miss: 20 Winners And Losers From The Goldman Sachs Fraud Accusation