There is an old saying on Wall Street: "Bulls make money. Bears make money. Pigs get slaughtered." In the eyes the Securities and Exchange Commission (SEC), a bullish Goldman Sachs conspired with a bearish hedge fund, Paulson & Co, to lead a couple of hapless clients to the slaughter.
Accusations by the SEC that Goldman Sachs misled investors in the now infamous Abacus collateralised debt obligation about the intentions of Paulson & Co, the hedge fund that made $1bn shorting subprime, have caused tidal waves on both sides of the Atlantic. Goldman Sachs is fighting the accusations tooth and nail and some commentators have even suggested the bank is prepared to 'bet the ranch' on winning this battle with the regulator.
Whatever the rights and wrongs of Goldman Sachs in this case, the actions of one firm should not be allowed to cloud the bigger issue of preventing another financial crisis. The Abacus case is one of many thousands that could potentially hit the US courts. There is a deep sense of frustration among markets professionals that the SEC is looking for the 'witch that poisoned the well', rather than a cure for the cholera that killed the village.
Many in the industry see the SEC's case against Goldman Sachs as an exercise in sabre rattling in a bid to rehabilitate its regulatory reputation following its drubbing by the court-appointed examiner into Lehman's bankruptcy for "standing idly by" as the bank got itself into trouble, and criticism of its handling of Allen Stanford's $7bn Ponzi scheme. The danger is that this sideshow clouds the issue and prevents good, considered and consistent regulation emerging from one of the darkest periods in the history of financial markets.
Does the IMF have the answer?
Recent proposals from the International Monetary Fund (IMF), however, could provide a framework. While initial reaction from bankers to yet another levy on their profits and activities was one of horror, a closer look reveals a more considered approach. The idea that all financial institutions, and not just a few named individual firms, pay a fee into a fund to help tackle any future mistakes is a fundamentally fair one. Some kind of compromise between growth and profits and avoiding another financial meltdown needs to be agreed. An international body of the IMF's standing and not politicians or wounded regulators should broker that compromise.
