06/19/2010 05:12 am ET Updated May 25, 2011

Goldman and the SEC

The Securities and Exchange Commission's civil suit against Goldman, Sachs & Co. (NYSE:GS) seems to have surprised everyone, not least Goldman itself. In retrospect, it probably shouldn't have -- though like a bubble prediction, calling the time and place for the government to strike is always difficult. The real story here isn't guilt or innocence. Goldman has already lost in the court of public opinion, and was beginning to lose as far back as Matt Taibbi's "vampire squid" characterization. Were Taibbbi's facts right? Hardly. Was he cartoonishly unsophisticated in the ways of high finance? Certainly. Given the scope of the crisis, however, someone would have to pay, and that someone increasingly looked like dominant Goldman.

Was the issuing of these charges political? Well, of course, but regulation exists within a political context, and the SEC needs a win. The agency only a year ago looked like it might be absorbed into some super-regulatory body, particularly after its nearly complete absence during the implosion of Wall Street and the Bernie Madoff affair. And while Mary Schapiro's SEC might be "independent," it clearly understands what's going on in Washington. The Wells notice went out to Goldman in July, and it's no coincidence that charges just happened to be filed Friday, on the eve of the Senate debate on financial reform and Goldman reporting its quarterly earnings, which are expected to be good.

Thus the moral drama of shock and self-righteousness begins. The fact is, much of what's in the case against Goldman, with the exception of the all-important failure to disclose, had already been reported, by the Wall Street Journal's Greg Zuckerman in his book on John Paulson; by the New York Times' Gretchen Morgenson and Louise Story; and particularly in terms of Deutsche Bank AG, in Michael Lewis' recently published "Big Short." (In fact, Lewis has Greg Lippmann, Deutsche's mortgage maven, refer caustically to buyers of toxic CDOs "from Dusseldorf," clearly IKB Bank, based in that German city. IKB was also a buyer of Goldman's Abacus CDOs.) All discussed the creation of synthetic CDOs in which short-selling hedge funders actively participated in selecting mortgages.

The defense Goldman appears to be readying -- that these were sophisticated buyers who knew the score and didn't need to be told Paulson was selecting the mortgages -- is its traditional defense, offered up by Lloyd Blankfein at the first hearings of Phil Angelides' investigatory commission. There's some validity to it; that's the way the game has evolved, under the SEC's own oversight, but it doesn't matter. What matters here isn't a case before a judge somewhere; it's in the court of public opinion, which doesn't understand the subtleties of screwing a customer. It's the very nature of financial crises to rewrite accepted practices. The '30s Pecora hearings humiliated the big banks, including the House of Morgan, and led to Glass-Steagall and the SEC. The government nailed Michael Milken and Drexel Burnham Lambert for the sins of the '80s and effectively destroyed Arthur Andersen -- and enacted Sarbanes-Oxley -- after Enron. Eliot Spitzer shamed Citigroup Inc. (NYSE:C) and Merrill Lynch & Co. to force a change in what had been accepted practice in research.

That's the way regulation goes and if Goldman is surprised by all this, it's yet more evidence that the firm doesn't fully fathom its power as a symbol of Wall Street practices that are now the subject of deep democratic revulsion. The rules really have changed, at least for now.