For Goldman Sachs, it was a relatively small transaction. But for the bank — and the rest of Wall Street — the stakes couldn’t be higher.
The civil lawsuit that the Securities and Exchange Commission filed against Goldman on Friday seemed to confirm many Americans’ worst suspicions about Wall Street: that the game is rigged, the odds stacked in the banks’ favour.
President Obama on Saturday stepped up pressure for financial reform by accusing Republicans of “cynical and deceptive” attacks.
The SEC’s action could also hit Wall Street where it really hurts: the wallet. It could prompt dozens of investor claims against Goldman and other Wall Street titans that devised and sold toxic mortgage investments.
On Saturday, several European banks that lost money in the deal said they were reviewing the matter. They could try to recoup from Goldman.
“The SEC suit against Goldman, if proven true, will confirm to people their suspicions about the total selfishness of these financial institutions,” said Steve Fraser, a Wall Street historian and author of Wall Street: America’s Dream Palace.
“There’s nothing more damaging than that. This is way beyond recklessness. This is way beyond incompetence. This is cynical, selfish exploiting.”
On Friday, Goldman’s stock took a beating, falling 13 per cent and wiping out more than $10 billion of its market value.
It is unclear whether the SEC can prevail against Goldman. The bank has long maintained that it puts its clients first and, in a letter in its latest annual report, it reiterated that position. Goldman said it never “bet against our clients” in
its trades but rather was trying to hedge against other trading positions.
The transaction cited in the SEC complaint cost investors just over $1 billion, relatively small by Wall Street standards.
Apart from retail investors, big victims include the Royal Bank of Scotland (now controlled by the British government) and the German bank IKB Deutsche Industriebank, as well as the German government.