Inside Wall Street: Goldman Sachs, Fraud, Arrogance and Conflicts

For Goldman Sachs (GS), size and power led straight to arrogance, which ultimately tripped up the investment bank. As the most influential and imperious financial-services firm, Goldman apparently assumed it had the brainpower and political wherewithal to exercise its assumed right to make money in any way it deemed appropriate.

And that's how Goldman came to ignore one of the most basic rules on Wall Street: Beware of any conflict of interest. Sheer arrogance blinded Goldman from understanding how damaging it was to be seen working against its clients' interests. In the Abacus collateralized debt obligation deal in which the Securities and Exchange Commission charged Goldman with securities fraud, the storied bank is accused of playing both sides of the transaction, without making that disclosure to investors. The SEC says Goldman was pitting itself against the very investors who thought the firm was helping them make money. Instead, they lost $1 billion, and Goldman struck gold (it now claims it actually lost $90 million on that particular deal).

From what the SEC contends, Goldman was selling investors a bill of goods. It was taking their money while secretly making sure that their investment would go south. Obviously, Goldman couldn't say to its clients, "oh, by the way, we expect the mortgage derivatives we sold you to go bust, so we bought insurance against them." Conflict of interest? Hard to see it any other way.

Cementing Suspicions That the Game Is Rigged

If there ever was a case that'll lead to cries of, "Let's curb Wall Street's greed and regulate derivatives deals," it's Goldman's brash behavior. President Obama now threatens to veto the financial overhaul bill in Congress unless it contains tight restrictions on Wall Street's flourishing derivatives operations. Goldman may now have helped ensure such restrictions.

Never in my many years of covering Wall Street has the government, the SEC in particular, brought against a firm as mighty as Goldman such a blistering case of fraud. The SEC's allegations are an eye-opening example of what the public always suspected: On Wall Street, the game is rigged against investors.

The SEC's civil suit against Goldman is now a big test case. If it turns out that the SEC fails in this pursuit, it will only deepen public perception that the government is totally helpless in facing up to the powerful titans of Wall Street.