Goldman Sachs declared a tidy $13.4 billion in net profit last year. Today, it is expected to declare first quarter results for this year that may be double what Goldman made in the same period last year. It is also expected to declare millions worth of bonuses for some of its staff, with the total reward money running into more than $5 billion. The 130-year-old giant that survived and thrived through the Wall Street meltdown would have the world believe that this has been because of its superior?more informed and more ethical?business practices. But that claim has taken two big hits this year. First came the Greece episode, wherein Goldman has emerged as a leader among banks that helped the country evade strict Euro membership caps on the size of government deficits. How? By way of derivative deals that never showed up in official statistics. Nothing illegal, just something shady. Now comes the charge by US Securities and Exchange Commission (SEC) that, at the urging of hedge-fund manager John Paulson, Goldman structured and sold subprime securities that Paulson had bet would fail. Again, SEC will find it hard to prove that there was anything illegal going on here. Goldman?s defence: ?In trades of this kind, there is always an investor going short. It is just common practice.? The bank says it was common practice for banks to devise securities products?including bundled mortgages?in partnership with hedge funds whose identities were not disclosed to buyers. As in Greece?s case, things are murky here and SEC will find it hard to actually prove illegality.
But there is a broader regulatory narrative at work in the US, within which the SEC-Goldman m?l?e may end up playing a key role. Democrats and President Barack Obama are trying to add to their healthcare legislation triumph with one involving financial regulation reform. The night before SEC charged at Goldman, Obama was telling a fundraiser that financial institutions profiting from the status quo were like piranha that simply tore upon reforms if they could. He would make sure that they couldn?t. Next day, Goldman was in trouble, its stock had dropped almost 13% and other big bank stocks had also taken a hit. Republicans hardly want to be seen as helping bail out big banks as long as the US voter is still convinced that the big boys have rigged the financial game. All that the President now needs to do is make a persuasive case that his financial reforms will thwart the creation of investments designed to fail, without hobbling the financial sector as a whole.
