I am far from being an investment banking expert, and so the ins and outs of the SEC charges against Goldman Sachs are perhaps better dealt with by other bloggers. But there are a few points I could make.
Firstly, the timing of all this this reinforces my sense that the Obama administration knows what it's doing. It's not the administration that's suing GS, but they've got a banking reform bill about to go through Congress and Obama has underlined the need to regulate derivatives trading, going so far as to say he'll veto any bill that doesn't include it. For the past year a lot of people have been complaining that the government isn't moving fast enough to get to the bottom of all kinds of iffy transactions with GS at the center. That inaction, combined with the presence of a lot of GS alumni in high places in the administration, contribute to the notion that the government is in bed with the banksters who crashed the economy.
Obama knows he can't fight a two-front war. The first year, he concentrated on health care reform and as soon as that's nailed down, the government moved against shenanigans in the financial industry. You can take on the health insurance industry or Wall Street, but try to do both at once and you'll get pulverized. I don't know if the SEC and the administration have coordinated the timing of their respective moves but it works out well this way.
Going into the midterm elections, the moves against Goldman Sachs will help to defuse the populist anger that Republicans have tended to mobilize in their favour. It's hard to criticize the current government as being in bed with big business when (a) it was your party that had near-total control of all three branches of government for most of the past eight years while the crisis was brewing and, in particular, failed to take serious action in the wake of Enron and Worldcom, and (b) your party is now obstructing the administration's attempt to crack down on securities fraud. There is some nonsense even Limbaugh listeners won't fall for.
That's the first thing. The second thing is that this initial move is a civil suit, not a criminal prosecution. Some may see that as a half-assed compromise, i.e. if successful, GS will get a slap on the wrist and no one will do any jail time. But as I understand it, criminal charges are much harder to prove than civil damages. The real effect of a civil suit is to get some relatively senior people on the stand and make them answer questions under oath--where, if they lie, they'd be subject to serious criminal charges on that basis alone.
So I think the civil suit is just a prelude to criminal charges down the road.
Which brings me to my third point. In the Yahoo News article on the GS charges, the following line jumps out at me:
"'The fact that the only individual charged here [Fabrice Tourre, creator of the allegedly fraudulent securities], after what was presumably a very thorough investigation, was a vice president rather than a managing director or higher, is relatively reassuring news for Goldman,' said Bank of America-Merrill Lynch research analyst Guy Moszkowski."
Thing is, whenever you move against some big organization, it's pretty standard to first aim at someone just below the guys at the top. That way you get someone who is in a position to give evidence on the real bad guys' involvement, in exchange for some degree of clemency or immunity. If I were Fabrice Tourre, and assuming the charges are ultimately proven, I would consider myself very lucky: it's the guy who gets targeted in the initial crackdown who has the most opportunity to cut a deal for himself by rolling over on his bosses. Unlike the actual Mafia, there is no omerta on Wall Street.