SEC Harpoons Giant Squid

Just a quick blog on the Goldman Sachs news which came out Friday evening and allows me to return to one of my favourite blogging grounds, namely bankers.

The news that the SEC (the Securities and Exchange Commission, the American version of our Financial Services Authority) has charged the world’s biggest and most successful investment bank with fraud directly related to the sub-prime mortgage crisis is extraordinary. Apparently those lovely chaps at Goldman’s were ‘allegedly’ advising clients to invest in mortgage CDOs whilst privately colluding with a hedge fund client to short sell the market (ie. betting on its collapse). It’s like a billion dollar version of “do as I say not as I do”.

Goldman’s, famously described once as a “giant squid wrapping itself around the face of humanity” has, of course, strenuously denied the accusations, but we can learn one or two things just from the fact that fraud has been alleged if not yet proven.

Firstly, Obama is still listening to Paul Volcker the former Chairman of the Federal Reserve who badly wants to rein in the banks and has already got his own rule, “the Volcker Rule” which forbids the banks trading on their own account ie. using their own money and potentially destroying their balance sheets if they get it wrong.

Secondly, the SEC is back in the game. After being asleep during build-up to the financial crisis and totally missing the world’s biggest ever Ponzi scheme, courtesy of Bernie Madoff, despite being warned that a 15 per cent return year on year, regardless of market conditions, was impossible, this marks something of a return to form.

Thirdly, it appears that there is a growing feeling in the corridors of power that Goldman’s is out of control, not least because the bank is about to payout another £3.5 billion bonus pot for three months work to its 31,700 employees.

One to watch.