If you take it upon yourself to do something as big as God’s work, the downside is that, every once in a while, you encounter some devil.
Five months after Goldman Sachs CEO Lloyd Blankfein told The Times (UK) that, as a banker, he was doing “God’s work”, he seems to have met his devil in the US Securities and Exchange Commission (SEC), which slapped his firm with a lawsuit on Friday.
The top US market regulator alleges that the investment bank misstated and omitted information when encouraging investors to buy a derivative, a collateralized debt obligation, based on mortgage bonds. The investors lost $1 billion: They didn’t know of the involvement of a hedge fund, which was betting against this derivative.
Such information asymmetry can’t be wished away from financial markets, which is why it’s imperative for regulators to stay on the lookout for fraud. Media reports suggest that this lawsuit is only the tip of the iceberg: SEC may also investigate similar mortgage deals by Deutsche Bank and Merrill Lynch, as well as looking into disclosures by firms such as General Electric. This could be newfound zeal for Western regulators, who are otherwise blamed for being asleep on the watch during the build-up of the crisis. But what will be the effect?
If we needed an indication of what it means to charge the world’s most powerful house of finance with fraud, consider that Goldman’s stock tumbled 13% on Friday, bringing the US stock markets and, later, global markets down.
If regulators launch more investigations and if other parties, too, sue Goldman, we won’t be surprised if markets discover a new kind of risk—after having overcome private sector risk and currently facing sovereign risk. B. Ramalinga Raju and Bernard Madoff last year were isolated events: If markets reacted adversely then, what would a chain of such cases unleash?
But this is their job: regulators are supposed to be checking not just fraud, but also exuberance for, say, exotic products. Because they didn’t do so earlier systematically means markets— used to big banks reaping profits, thanks to this exuberance— could construe any act now either as an overreaction or as political. So the likes of Goldman have become so big for the market that, whatever regulators choose, the rest of us are caught between the devil and the deep blue sea.
Is there a new kind of regulatory risk in town? Tell us at email@example.com