The US Securities and Exchange Commission (SEC) has just opened a case for fraud against Goldman Sachs. The case concerns a complex instrument, known as a Consolidated Debt Obligation (CDO), which Goldman Sachs put together. A CDO is a collection of equitised sub-prime mortgages. The allegation is that Goldman was put up to this by John Paulson, a well-known hedge fund manager. At that time in early 2007, the sub-prime mortgage market was still bullish and banks across the world were keen to get a piece of the action. Paulson was later credited with being the one person who foresaw the coming collapse and shorted the market making $1 billion.

The contention of the SEC is that it was John Paulson who had selected the assets that went into the CDO, which Goldman sold to its customers. Technically, Goldman asked another agency ACA to select and ?ratify? the contents of the CDO. When the sub-prime market collapsed, many banks lost money. On this CDO, Goldman itself lost $100 million, while ACA lost $900 million, for which ABN-AMRO (now owned by Royal Bank of Scotland) accepted liability.

If it can be proved that Paulson had chosen the assets and Goldman knew as of then that Paulson was shorting the sub-prime market assets, then legally Goldman should have warned the purchasers of the CDO that Paulson was playing against it. The SEC has not cited Paulson in the case but only Goldman.

Bankers are not popular and Goldman has had bad press for a long time. It is fast growing, brash and it makes a lot of money?roughly $3 billion in the first quarter of 2010. In the US, Obama has raised the stake against the Wall Street and Congress is debating a complex piece of legislation regulating the financial sector. Still, I cannot see the case the SEC is trying to make. Goldman was selling an instrument that was well known in the market for some years. The buyers were not innocent small savers but sophisticated banks who should have taken their own view of which way the sub-prime mortgage market was heading. In 2007, it was very eccentric to think that the sub-prime market would tank. Paulson is guilty of being one step ahead of the rest and taking a contrary position.

It is a puzzle that when economics is being accused of telling everyone that markets are perfect and that everyone has identical expectations (which is why we are told the markets collapsed), the SEC is punishing Goldman for not foreseeing that it was wrong. With hindsight Paulson set everyone up, perhaps. But that is only with hindsight. SEC seems to have jumped the gun and tried to make political capital out of the unpopularity of Goldman. My own hunch as a non-lawyer is that Goldman will win the case. By not including Paulson in the list of accused, SEC has given the game away. The issue is not whether the large profits made by banks are moral but whether the particular sale was fraudulent. Even terrorists deserve a fair hearing and so do successful bankers.

What is much more likely is that some form of Tobin tax will now become a reality. When James Tobin, the Nobel Laureate from Yale proposed it in the early 1970?s he was trying to curb speculation in foreign exchange markets, which had just become liberated from the old Bretton Woods arrangement of the Dollar-Exchange Standard. Many NGOs got very enthusiastic as their collective mouths began watering at how much money could be collected through such a tax. But there were many cogent objections against it, especially about reducing liquidity in forex markets. Now 40 years on, we have had a crisis. Banks not only collapsed but also had to be rescued at taxpayers? expense. (I was and continue to be against all bank rescues. Banks should be allowed to fail.) So it is legitimate that taxpayers who have bailed out banks do something to prevent it from happening again and if that is not possible (banks will fail again sure as eggs is eggs) at least collect money as insurance.

So we are to have a financial activities tax. This will be in addition to taxes on bankers? bonuses. I cannot say that I terribly mind. Banks will find some way to pass it on to their customers and all will go on as before. The recovery in the profits of large multinational banks is breathtakingly fast and many governments who bought equity while bailing out these banks stand to make profits. Money does grow on trees. Let us plant a few more.

The author is a prominent economist and Labour peer