SEC suit raises questions

MIKE LICHT, NOTIONSCAPITAL.COM // FLICKR

Did financial institutions play naughty before the financial crisis in the fall of 2008? According to top federal regulators, investment bank Goldman Sachs did. Last week, the Securities and Exchange Commission (SEC) filed a civil suit against the bank, alleging fraud against its clients. In the months leading up to the financial crisis, Goldman Sachs sold its clients a complex financial instrument that ultimately lost money. The SEC suit alleges that Goldman Sachs knew that the instrument would lose money but sold it anyways for short-term profit. Proving that Goldman Sachs had intent to defraud customers is extraordinarily difficult.

What’s most interesting here are the political implications of this suit. As we speak, Congress is hotly debating a bill to reform the entire financial sector. The package, as mentioned in an earlier post, will cover regulation in every area of finance, from mortgages to student loans to derivatives. Several in Congress are blocking its passage because it may hurt business too much. Supporters of the bill, such as Senate sponsor Chris Dodd (D-CT), claim firms like Goldlman Sachs hurt “main street” business with their excesses.

Enter the recent suit. On Tuesday, Rep. Darell Issa (R-CA) sent a letter to the SEC asking for further documentation surrounding the suit. Issa questions the timing of the suit, believing the suit may help legislation move through Congress. The SEC is an independent agency, meaning that it does not report to the Obama Administration. Nevertheless, SEC Chairman Mary Shapiro is a devout Obama ally.

With this in mind, I want to ask you your thoughts on the debacle. Suppose, for a moment, that the SEC did not file the suit, and did not allege fraud. Did Goldman Sachs act irresponsibly, or did they just act as any other profit-seeking business would?