Goldman Sachs, Fabrice Tourre and the SEC: Obama's Double Game, Pandora's Box – or BOTH?

By David Caploe PhD, Chief Politics Economist, EconomyWatch.com.

Like nearly every other element of the global financial and economic mess that both triggered and has followed from Black September 2008,

By David Caploe Expert degree, Chief Political Economist, EconomyWatch.com.

Like virtually every other element of the global monetary and economic mess that both caused and has followed from Black September 08,

the April 16 announcement through the US Securities and Exchange Commission [SEC] civil match for fraud against Goldman Sachs offers raised more questions compared to answers.

Despite the seeming significance of the transfer – involving, as it does, Goldman Sachs, the most visible / profitable Or and politically connected of the many Walls Street firms that have prospered mightily, DESPITE the world-wide pain their actions have caused – several aspects stay unclear.

So let’s start with what we should DO know, and then try to illuminate a few of the many areas that remain murky.

1)    

In spite of Goldman’s prominence, the way the SEC handled the announcement was, to put it mildly, unusually rude, and quite different than the way it usually handles relations with the targets of its investigations.

In common, there are extensive discussions between your SEC and its targets BEFORE any announcement is made.

Indeed, the actual “normal” course of action is the announcement of both the bringing of charges AND the settlement agreed to at the same time.

However cozy an overall relationship that might indicate between the SEC and the industry it regulates, the fact the announcement clearly caught Goldman by surprise was a radical variation within standard operating procedure [SOP], and is hard to interpret as something OTHER than an intentional slap in the face.

2)  

Given this clear leaving from SOP, the SEC and, undoubtedly, the Obama administration – which HAD to provide the go-ahead for such a potentially mind blowing move, as well as the way it had been handled – were clearly trying to signal SOMETHING.

But it remains completely unclear WHAT they were trying to say – and to whom.

Were they trying to inform an angry public – concerned by the worsening spectre of joblessness, while Wall Street profits and compensation skyrocketed –

that, to use the Clinton phraseology, they “felt their pain,” and were going to – lastly – DO something about the corporations which had caused it ???

Were they attempting to tell Wall Street these were – finally – fed up, and going to begin riding herd on them,

regardless of their massive power via the limitless and, given the insane decision in Citizens United, ever-increasing requirement for campaign finance contributions ???

This was certainly the – hopeful – meaning of many consistent critics of the “kid glove” treatment Team Obama has given Wall Street to this point.

3)  

But if this does, in fact, signal a radical turnaround in the way the actual Obama administration is handling Wall Street, that only raises more questions – first and foremost, why would they pick what many informed observers see like a – legally – relatively weak case on which to make a stand ???

Now there is the comeback to that: namely, this is only the beginning,

and the rude departure from SOP by the SEC is intended to make sure Goldman will, because it has said, fight this case in the court, and NOT, as is usual, seek a settlement.

The significance of an open and extended legal battle, many observers point out, would reveal to public scrutiny – via the lawful process of discovery –

the sordid game not just Goldman, but the entire inter-connected web of Walls Street banks, have been actively playing – both before and after Dark September.

In that context, perhaps the most hopeful sign is the fact that the SEC move will give a good imprimatur of legitimacy to what some of these same observers argue will be a cascade of lawsuits that build on the SEC action.

If that DOES occur, it may indeed turn out to be the "straw that broke the camel’s back" in terms of what has been, until now, the reluctance of ANY of the parties involved in these transactions to find legal redress –

in which case, this could be the harbinger of a very big change in the whole politics / legal framework by which not just Goldman, but all Wall Street firms, conduct their business.

4)  

But that possibility, in turn, only boosts MORE questions, most immediately:

given that Obama has basically continued the Cheney / Plant policy of giving Walls Street and other Too-Big-To-Fail [ TBTF] banks anything they want,

why make a seemingly revolutionary change NOW ???

This is where the whole “dual game” theory comes into play.

Proponents of this view – certainly one of whom participated in the Room for Debate piece linked to over – see the move as related, even if indirectly, to the impending Senate debate on “financial reform”.

The argument here is that – having seen he got nowhere with the Republicans as well as their corporate handlers in the various “health” industries when it came to health care “reform” –

Obama understands he has to ramp up the “neighborhood organizer / tough Chi town pol” aspect of his admittedly multi-faceted character, dump the “bi-partisan” nonsense that has clearly failed, and play a little hardball

IF he has any about getting through the Senate the – in our view, totally weak-kneed and insufficient – financial “reform” he is proposing.

Put bluntly, given the Senate Republicans’ seeming 41-vote solidarity Towards him, he has to give the United states senate Democrats SOME kind of stick with which to cleave away at least several Republicans,

not to validate the “bi-partisan” foolishness, but simply to make sure that SOME kind of bill DOES pass.

In this look at, at least APPEARING to take on Goldman – even with an admittedly weak lawsuit – will be enough to make some “moderate” Republicans –

especially those who are up for election this November,

and don’t wish to appear to be TOTALLY bought-and-paid-for by the same Wall Street gang

whose shenanigans possess brought the lending deep freeze and consequent unprecedented joblessness to Main Street –

go along with what is, after all, a not-especially tough “reform,”

which, in the end, their corporate patrons are going to have few problems making your way around, given their well-paid and innovative legal advisers.

5)   

And given a somewhat cynical, albeit realistic, view of the degraded state of American public discourse, it’s not the worst bet on the planet to think the whole thing can be stage-managed within the following way:

Having made it’s play to extract credits from a minimal number of possibly vulnerable Senate Republicans, Obama can tell the actual SEC to take a “slow” as well as “down-low” approach for the next period,

using the actual “we want the judicial process to take its course” rhetoric, and keeping the case OFF the front pages.

Then, once Obama has won passage of a “financial reform” that, as with the health “care” “reform”, is something the industry can easily live with,

the SEC as well as Goldman announce a negotiated negotiation,

in which the latter agrees to pay for a fine that, whatever the amount, is a sum they can effortlessly afford, given their immense profits.

Obama and the SEC can then state victory in this entire arena, not bother to bring anymore cases, and everything will go along as before:

Wall Street is happy, Obama has an additional “big” legislative “victory”, the Democrats don’capital t get killed in the November elections,

and Obama’s “progressive” supporters, in the immortal words of Sonny Corleone, are left holding their d—ks in their hands.

6)  

But even if this “double game” scenario – APPEARING to visit after Goldman, while not in fact planning to follow through – is, unfortunately, all as well plausible,

there IS at least a possibility the procedure thereby unleashed can, in fact, “get free from control.”

And this is where the Pandora’s Box aspect comes into play.

As indicated over, it’s not hard to imagine a predicament where domestic anger at Wall Street –

whether on the part of Obama’s alleged "progressive" base, whom he has shown little hesitation within ignoring to this point, or the Tea Party gang –

can be included by seeming to “get tough,” while in fact merely continuing business-as-usual.

At the same time, there IS the possibility the actual SEC is, in fact, playing for keeps,

basically in order to modify its well-deserved reputation as Wall Street’s lapdog gained during the Cheney Or Bush years,

when it completely rolled over for any “request” it caused by the financial sector.

Now if this IS the case – and it’s a large IF, the worries of Business 7 days and many other corporate internal organs aside –

then, in fact, the hopes of Simon Johnson, Robert Kuttner, and a whole host of others centered around the Huffington Publish –

that this represents a radical change in what has heretofore been Obama’s continuation of Cheney / Bush policies towards Wall Road and the whole TBTF sector of the American political economy –

may well be confirmed.

To be perfectly honest, we are doubtful about this,

even if it is, as Shakespeare stated in his most famous soliloquy, “To Be Or Not To Be,” from Hamlet, “a consummation devoutly to be wished”.

That said, there is a real danger – not just for Goldman, but also Obama, insofar because this is a “double game” ploy, meant fundamentally for domestic consumption – in the reaction of significant players OUTSIDE the US.

Indeed, both the German and UK governments have, in the wake of the SEC suit, begun investigations into Goldman’s actions, since both British as well as German banks were involved in this situation.

Even here, though, there may be less than meets the eye.

This is because both British Prime Minister and German Chancellor Angela Merkl face elections THEMSELVES in the next couple weeks,

and each of them would like nothing more, in both the short- and long-term,

than to shift responsibility for their OWN negligence in managing THEIR financial industries onto evil Wall Street and several complicit American organizations.

7)   

In conclusion, then, there remain at this time many more UN-answered questions than certainties regarding just WHAT the SEC’s – and Obama’s – “Goldman gambit” means.

It really could be the beginning of the far-reaching change in the whole way Obama and the rest of official Wa deal with the key issue associated with Wall Street and TBTF organizations in general –

especially given the news which Goldman’s profits rose an astonishing 91 per cent over the very first quarter of 2009,

which will certainly not make the “double game” situation any easier for them to pull off, if that is indeed the perform here.

And today’s appearance before the Home Financial Services Committee of court-appointed Lehman examiner Anton Valukas –

the man who made us all painfully aware of the now-infamous Repo 105 – will also "stiffen the spine", as it were, of the SEC,

since his scheduled testimony reportedly attacks that agency –

admittedly under different leadership during the Cheney / Plant years –

for failing to do anything to stop the shady practices which, eventually, led to Lehman’s collapse.

All having said this, we still remain dubious this type of change is going to come as long as the President retains Larry Summers and Tim Geithner as his key economic policymakers,

given, once we have discussed numerous times, Geithner’s complicity in the Black Sept 2008 meltdown, and their joint “unshackling” of derivatives during the last moments of the Clinton administration.

If, on the other hand, we see them replaced by the likes of Brooksley Born or Joe Stiglitz or Paul Krugman – despite his deeply mistaken position on Chinese language currency values –

and there is a substantive change in the nature of the "financial reform" being proposed,

the least of which is to, as Senator Blanche Lincoln seems to want, either ban complex derivatives or make them COMPLETELY transparent –

then we might start to believe there is really going to be a change.

But until then, regrettably, we are not yet convinced that even the seemingly dramatic events along with Goldman and the SEC are anything more than, to paraphrase perhaps Shakespeare’s 2nd most famous soliloquy, from Macbeth, “a tale filled with sound and fury, signifying not too much."

Happy 4/20.

 

David Caploe PhD

 

Chief Political Economist

EconomyWatch.com

President / acalaha.com