No Matter What the Outcome, Goldman Isn't Going Away

Wall Street Goldman Sachs Fraud
Wall Street Goldman Sachs Fraud

Just a hunch here (and you can put this prediction in the category of "not going out on a limb"), but Goldman Sachs (GS), charged by the U.S. Securities and Exchange Commission with committing securities fraud, will survive.

What the new Goldman will look like, though, will obviously depend on the how much -- if any -- of the SEC's complaint can be proved true in court. Barring the worst of all possible scenarios for the firm -- one in which all or nearly all of the SEC's allegations are proven to be true -- Goldman Sachs will continue in its present form and keep playing a large role in two areas that are critical in today's global financial markets: prime brokerage and debt financing.

Note that the modifier -- "critical" -- was used to describe Goldman's role in global financial markets. That doesn't mean the current system is ideal, efficient, fair or even represents the best way to allocate capital. It may be none of that, but the point here is that taking Goldman out of the picture would leave a huge void -- a chasm so large that even the most knowledgeable and compelling Goldman critics would argue it's highly unlikely the current SEC case will result in a financial system without "Golden Slacks."

Serious Charges

Don't take any of this as a defense of Goldman's alleged transgressions: It's not. If the SEC's charges are proven true beyond a reasonable doubt, it will mean Goldman was involved in one of Wall Street's biggest scandals: Failing to disclose that it allowed a hedge fund, Paulson & Co., to determine or help determine what securities were packaged in a collateralized debt obligation, giving Paulson an unfair advantage when it later shorted the poor-quality CDO. Goldman then told other investors that the securities were selected by an independent, objective third party, the SEC alleges.

That's sort of like an administrator for an entrance exam at an elite prep school slipping the answers to a few students from well-connected families whom he wants to see admitted, then telling the rest of the applicants -- the general public -- that the exam's questions were composed by an independent third party, and no one knew what the questions would be beforehand. Of course the students furnished with the answers beforehand would gain admission: The system was rigged.

If the SEC's charges are true, Goldman rigged the financial system. Think of the magnitude of this alleged fraud. In the dot-com bust, the typical man-on-the-street investor lost money buying stock in companies that should never have gone public or went public too soon. In the Enron fraud, ordinary investors were tricked into investing in a company by false, inflated earnings statements.

Not a Confidence-Builder. . .for Any Investor

But if the SEC's charges against Goldman are true, not only were average Joes placed at a disadvantage by Goldman's finagling but so, too, were major investors with many millions of dollars in assets. It's quite possible that Goldman placed accredited investors, institutional investors -- potentially even governments -- in a disadvantageous position. Needless to say, that scenario wouldn't do much to increase the typical investor's confidence in U.S. stock and bond markets. Such an investor is likely to think, "If the system was rigged even against major institutional investors, what chance do I, with my modest amount of money, have?"

For now, here's hoping that the Paulson issue is an anomaly, an isolated incident at Goldman, perhaps traceable to one or two "rogue" investment bankers who didn't mesh with Goldman's culture or who found a way to deviate from Goldman's standards.

But if the SEC's charges are true, Americans can justifiably ask: "Why should the nation entrust functions so critical to global financial markets to Goldman, or any other investment bank, when we know their transgressions would result in enormous harm?"