There is an old saying on Wall Street: “no one rings a bell at the top.” The same metaphor can apply to financial crises. Plus, these aphorisms can lead to epiphanies: things are never going to be the same again.
In February 2007, HSBC issued a loss warning related to subprime lending, the first such announcement in its 142-year history. See HSBC’s First Profit Warning Ushered in the Crunch. CNBC tried to minimize the development pointing out this was only one bank and HSBC was responding to the problem by signaling a $10b write-off. One month later, Ben Bernanke testified before Congress that “problems in the subprime markets seem likely to be contained.” At the time I believed that this was a warning shot ushering in the financial crisis. In my own portfolio I acted accordingly, sold my stocks, and urged family members to do the same.
The SEC v. Goldman lawsuit appears to be another watershed moment.
The Surprise Complaint
SEC v. Goldman is something other than business as usual. Pertinent points:
- Announcement of the complaint caught Goldman by surprise.
- Wells Notice – The SEC sometimes issues a Wells Notice to inform a company that they may be the subject of an enforcement proceeding. Companies usually disclose receipt of such a notice in a public 8-k filing. Goldman did not do so, perhaps believing that it was not material or that they had defenses to the charge. See Goldman Sachs Said to Have Been Warned of SEC Lawsuit.
- Past SEC practice is to negotiate with the company and announce the action and the settlement simultaneously. It appears there were no serious settlement discussions.
- This week Congress seriously moves financial reform legislation into law. Filing the fraud suit is a way to galvanize public support for reform.
- Morgan Stanley was selected over the politically connected Goldman to underwrite the sale of the government’s position in Citicorp.
- The German and UK governments have opened inquiries into Goldman’s CDO practices and have contemplated lawsuits to recover losses. See German,UK Demand Goldman Sachs Probe.
- Special Inspector General for TARP, Neal Barofsky, is working with the Department of Justice to examine whether securities sold by Goldman to AIG constituted a fraud on US taxpayers.
- Congresswoman Marcy Kaptur has written to US Attorney General Eric Holder demanding a DOJ investigation of Goldman
Supporters and Detractors
Dick Bove, a bank analyst at Rochdale Securities, felt the lawsuit would be settled with a manageable fine and reiterated his buy recommendation on Goldman’s stock. Unfortunately for Goldman, Mr. Bove was amazingly wrong on bank stocks throughout the financial crisis. What Mr. Bove is not considering is the potential Pandora’s Box of lawsuits by defrauded investors. It is too early to calculate the reputational damage to Goldman. Perhaps the selection of Morgan Stanley to handle the Citicorp offering is a harbinger of other future Goldman underwriting losses. Also Mr. Bove did not consider a newly emboldened SEC. Stung by public criticism as a lapdog of the industry, the SEC may use this lawsuit to conduct further discovery implicating more senior executives at Goldman and other firms.
Goldman Was Not Alone
Unemployment remains high and credit remains limited for small business and individuals. Wall Street continues to ignore the rising public mood of anger: Jamie Dimon lectures the German government on over regulating banks and blithely predicts bank crises every 5-7 years; Lloyd Blankfein informs the public that Goldman does the Lord’s work; CEO’s continue to receive record Wall Street bonuses, Wall Street still opposes financial reform legislation.
This is the wrong time in financial history to be tone deaf to the public. Despite the pundit’s attempt to minimize the SEC complaint as a relatively minor matter, there is something more going on. And come November, this public anger could very well threaten Democratic Congressional majorities and all incumbents.
The financial industry which has caused so much damage to the economy may have just met its match. None too soon.
loading...
Related posts:
- Surfing the Financial Crisis
- A Disturbance at the Casino – Goldman Faces SEC Charges
- Some Random Thoughts on Goldman
- A Reputation as Good as Goldman? Part I
- A Reputation as Good as Goldman Part II
Tags: Dick Bove, DOJ, Goldman Sachs, HSBC, Jamie Dimon, Lloyd Blankfein, Marcy Kaptur, Morgan Stanley, Neal Barofsky, SEC v. Goldman, Wells Notice
