Goldman Sachs, Fabrice Tourre and the SEC: Obama's Double Game, Pandora's Box – or BOTH?

By: David Caploe   Date: 20 April 2010

About The Author

David Caploe

Honors AB in Social Theory from Harvard and a PhD in International Political Economy from Princeton.

David Caploe, EconomyWatch Contributor

 

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By David Caploe PhD, Chief Political Economist, EconomyWatch.com.

Like nearly every other element of the global financial and economic mess that both caused and has followed from Black September 2008,

By David Caploe PhD, Chief Political Economist, EconomyWatch.com.

Like nearly every other element of the global financial and economic mess that both caused and has followed from Black September 2008,

the April 16 announcement by the US Securities and Exchange Commission [SEC] civil suit for fraud against Goldman Sachs has raised more questions than answers.

Despite the seeming significance of the move – involving, as it does, Goldman Sachs, the most visible / profitable / and politically connected of the many Wall Street firms that have prospered mightily, DESPITE the world-wide pain their actions have caused – several aspects remain unclear.

So let’s start with what we DO know, and then try to illuminate some of the many areas that remain murky.

1)    

In spite of Goldman’s prominence, the way the SEC handled the announcement was, to put it bluntly, unusually rude, and quite different than the manner it usually handles relations with the targets of its investigations.

In general, there are extensive discussions between the SEC and its targets BEFORE any announcement is made.

Indeed, the “normal” course of action is the announcement of both the bringing of charges AND the settlement agreed to at the same time.

However cozy an overall relationship that might indicate between the SEC and the industry it regulates, the fact the announcement clearly caught Goldman by surprise was a radical variation in standard operating procedure [SOP], and is hard to interpret as anything OTHER than an intentional slap in the face.

2)  

Given this clear departure from SOP, the SEC and, without doubt, the Obama administration – which HAD to give the go-ahead for such a potentially explosive move, as well as the way it was handled – were clearly trying to signal SOMETHING.

But it remains completely unclear WHAT they were trying to say – and to whom.

Were they trying to tell an angry public – worried by the worsening spectre of joblessness, while Wall Street profits and compensation skyrocketed –

that, to use the Clinton phraseology, they “felt their pain,” and were going to – finally – DO something about the corporations that had caused it ???

Were they trying to tell Wall Street they were – finally – fed up, and going to start riding herd on them,

regardless of their massive power via the endless and, given the insane decision in Citizens United, ever-increasing need for campaign finance contributions ???

This was certainly the – hopeful – interpretation of many consistent critics of the “kid glove” treatment Team Obama has given Wall Street to this point.

3)  

But if this does, in fact, signal a radical turnaround in the way the Obama administration is handling Wall Street, that only raises more questions – first and foremost, why would they pick what many informed observers see as a – legally – relatively weak case on which to make a stand ???

Now there is a comeback to that: namely, this is only the beginning,

and the rude departure from SOP by the SEC is intended to make sure Goldman will, as it has said, fight this case in court, and NOT, as is usual, seek a settlement.

The significance of an open and extended legal battle, many observers point out, would reveal to public scrutiny – via the legal process of discovery

the sordid game not just Goldman, but the entire inter-connected web of Wall Street banks, have been playing - both before and after Black September.

In that context, perhaps the most hopeful sign is that the SEC move will give an imprimatur of legitimacy to what some of these same observers argue will be a cascade of lawsuits that build on the SEC action.

If that DOES happen, it may indeed turn out to be the "straw that broke the camel's back" in terms of what has been, until now, the reluctance of ANY of the parties involved in these transactions to seek legal redress -

in which case, this could be the harbinger of a very big change in the whole political / legal framework in which not just Goldman, but all Wall Street firms, conduct their business.

4)  

But that possibility, in turn, only raises MORE questions, most immediately:

given that Obama has essentially continued the Cheney / Bush policy of giving Wall Street and other Too-Big-To-Fail [ TBTF] banks whatever they want,

why make a seemingly radical change NOW ???

This is where the whole “double game” theory comes into play.

Proponents of this viewone of whom participated in the Room for Debate piece linked to abovesee the move as related, even if indirectly, to the imminent Senate debate on “financial reform”.

The argument here is that – having seen he got nowhere with the Republicans and their corporate handlers in the various “health” industries when it came to health care “reform” –

Obama realizes he has to ramp up the “community organizer / tough Chicago pol” aspect of his admittedly multi-faceted personality, dump the “bi-partisan” nonsense that has clearly failed, and play a little hardball

IF he has any hopes of getting through the Senate even the – in our view, totally weak-kneed and inadequate – financial “reform” he is proposing.

Put bluntly, given the Senate Republicans’ seeming 41-vote solidarity AGAINST him, he has to give the Senate Democrats SOME kind of stick with which to cleave away at least a few Republicans,

not to validate the “bi-partisan” foolishness, but simply to make sure that SOME kind of bill DOES pass.

In this view, at least APPEARING to take on Goldman – even with an admittedly weak legal case – will be enough to make some “moderate” Republicans –

especially those who are up for election this November,

and don’t want to appear to be TOTALLY bought-and-paid-for by the same Wall Street gang

whose shenanigans have brought the lending freeze and consequent unprecedented unemployment to Main Street

go along with what is, after all, a not-especially tough “reform,”

which, in the end, their corporate patrons are going to have few problems getting around, given their well-paid and ingenious legal advisers.

5)   

And given a somewhat cynical, albeit realistic, view of the degraded state of American public discourse, it’s not the worst bet in the world to think the whole thing can be stage-managed in the following way:

Having made its play to extract concessions from a minimal number of potentially vulnerable Senate Republicans, Obama can tell the SEC to take a “slow” and “down-low” approach for the next period,

using the “we want the judicial process to take its course” rhetoric, and keeping the case OFF the front pages.

Then, once Obama has won passage of a “financial reform” that, as with the health “care” “reform”, is something the industry can easily live with,

the SEC and Goldman announce a negotiated settlement,

in which the latter agrees to pay a fine that, whatever the amount, is a sum they can easily afford, given their immense profits.

Obama and the SEC can then declare victory in this entire arena, not bother to bring any more cases, and everything goes along as before:

Wall Street is happy, Obama has another “big” legislative “victory”, the Democrats don’t get killed in the November elections,

and Obama’s “progressive” supporters, in the immortal words of Sonny Corleone, are left holding their d—ks in their hands.

6)  

But even though this “double game” scenario – APPEARING to go after Goldman, while not in fact intending to follow through – is, unfortunately, all too plausible,

there IS at least a possibility the process thereby unleashed can, in fact, “get out of control.”

And this is where the Pandora’s Box aspect comes into play.

As indicated above, it’s not hard to imagine a scenario where domestic anger at Wall Street –

whether on the part of Obama’s alleged "progressive" base, whom he has shown little hesitation in ignoring to this point, or the Tea Party gang –

can be contained by seeming to “get tough,” while in fact merely continuing business-as-usual.

At the same time, there IS the possibility the SEC is, in fact, playing for keeps,

basically in order to amend its well-deserved reputation as Wall Street’s lapdog gained during the Cheney / Bush years,

when it completely rolled over for any “request” it received from the financial sector.

Now if this IS the case – and it’s a big IF, the worries of Business Week and many other corporate organs aside

then, in fact, the hopes of Simon Johnson, Robert Kuttner, and a whole host of others centered around the Huffington Post

that this represents a radical change in what has heretofore been Obama’s continuation of Cheney / Bush policies towards Wall Street and the whole TBTF sector of the American political economy

may well be validated.

To be perfectly honest, we are doubtful about this,

even if it is, as Shakespeare said in his most famous soliloquy, “To Be Or Not To Be,” from Hamlet, “a consummation devoutly to be wished”.

That said, there is a real danger – not just for Goldman, but also Obama, insofar as this is a “double game” ploy, intended fundamentally for domestic consumption – in the reaction of significant players OUTSIDE the US.

Indeed, both the German and UK governments have, in the wake of the SEC suit, begun investigations into Goldman’s actions, since both British and German banks were involved in this situation.

Even here, though, there may be less than meets the eye.

This is because both British Prime Minister and German Chancellor Angela Merkl face elections THEMSELVES in the next few weeks,

and each of them would like nothing more, in both the short- and long-term,

than to shift responsibility for their OWN negligence in managing THEIR financial industries onto evil Wall Street and several complicit American administrations.

7)   

In conclusion, then, there remain at this point many more UN-answered questions than certainties about just WHAT the SEC’s – and Obama’s – “Goldman gambit” means.

It really could be the beginning of a far-reaching change in the whole way Obama and the rest of official Washington deal with the key issue of Wall Street and TBTF organizations in general –

especially given the news that Goldman’s profits rose a whopping 91 per cent over the first quarter of 2009,

which will certainly not make the “double game” scenario any easier for them to pull off, if that is indeed the play here.

And today's appearance before the House Financial Services Committee of court-appointed Lehman examiner Anton Valukas -

the man who made us all painfully aware of the now-infamous Repo 105 - will also "stiffen the spine", as it were, of the SEC,

since his scheduled testimony reportedly attacks that agency -

admittedly under different leadership during the Cheney / Bush years -

for failing to do anything to stop the shady practices that, eventually, led to Lehman's collapse.

All this said, we still remain dubious such a change is going to come as long as the President retains Larry Summers and Tim Geithner as his key economic policymakers,

given, as we have discussed numerous times, Geithner’s complicity in the Black September 2008 meltdown, and their joint “unshackling” of derivatives during the final moments of the Clinton administration.

If, on the other hand, we see them replaced by the likes of Brooksley Born or Joe Stiglitz or Paul Krugman – despite his deeply mistaken position on Chinese currency values

and there is a substantive change in the nature of the "financial reform" being proposed,

the least of which is to, as Senator Blanche Lincoln seems to want, either ban complex derivatives or make them COMPLETELY transparent -

then we may start to believe there really IS going to be a change.

But until then, unfortunately, we are not yet convinced that even the seemingly dramatic events with Goldman and the SEC are anything more than, to paraphrase perhaps Shakespeare’s second most famous soliloquy, from Macbeth, “a tale full of sound and fury, signifying not too much."

Happy 4/20.


 

David Caploe PhD

 

Chief Political Economist

EconomyWatch.com

President / acalaha.com

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