The Senate's attempt at Goldman-like fraud
Fraud, a crime in finance, is often merely an insult in politics. But there are disturbing parallels between the securities fraud charges outlined in the Securities and Exchange Commission's civil lawsuit against Goldman Sachs and Senate Minority Leader Mitch McConnell's fraudulent case against financial reform. Only, in one case the apparent victims were sophisticated investors, and in the other the designated saps are American voters.
Goldman stands accused of creating and marketing an investment tied to subprime mortgages without disclosing that the underlying securities had been selected by a billionaire investor, John Paulson, who was betting on their failure. The Wall Street powerhouse may have been alone in this particular ugliness -- Bear Stearns, hardly a paragon of virtue, apparently turned down a similarly structured deal with Paulson. But it's clear that fraud was pervasive in the lead-up to the financial debacle. Last week, Senate hearings exposed the fraudulent mortgage practices that were central to Washington Mutual's business plan. The Lehman Brothers bankruptcy report revealed the use of accounting gimmicks to hide debt -- a tactic that the Wall Street Journal suggests remains widespread in the industry. We saw how Goldman arranged complicated currency swaps that enabled politicians in Greece to mask the level of that country's debt while marketing its bonds, practices that were apparently widespread with U.S. municipalities as well. And ProPublica, the Pulitzer Prize-winning investigative organization, exposed how several banks helped the hedge fund Magnetar market similar securities that Magnetar was betting on to fail.
The activities among these that are illegal should be prosecuted; the scams that are not yet illegal should be banned. In particular, complex financial innovations should be outlawed or forced into open exchanges, with banks required to put their own money at risk in any complex security they market. We also need an independent and aggressive Consumer Financial Protection Agency that will police everything from payday lenders to credit card companies that have thrived by gouging their customers. We need to alter the compensation schemes that give bankers million-dollar incentives to cut corners. And we need to radically simplify the financial system, with banks that are too big to fail broken into more manageable entities.
The bill now before the U.S. Senate does not go far enough, though some senators are trying to move it in the right direction. Among them are Democrats Sherrod Brown (Ohio), who will offer an amendment to limit the size of banks, and Blanche Lincoln (Ark.), who has surprised critics by proposing legislation to crack down on derivatives trading. Still, with the bank lobby spending millions and employing more than 125 former legislators and aides to delay, dilute and disembowel reform, these efforts must survive a nasty political debate marked by its own form of fraud.
Just before the SEC charges against Goldman were released, McConnell -- who has been promoting his party to Wall Street political donors as the banks' last line of defense -- issued a letter signed by all 41 Republican senators in opposition to the financial reform bill. But Republicans are aware that appearing to be in the pocket of the big banks could be dangerous to their political health. So McConnell followed the playbook, virtually word for word, of cynical Republican pollster Frank Luntz, who urged Republicans to trumpet their desire for reform, while smearing any Democratic plan as leading to more taxpayer-funded Wall Street bailouts. McConnell criticized Democrats for rushing the bill out of committee on a party-line vote, when it was Republicans on the committee who pushed to pass the bill, putting off amendments and debate until it got to the Senate floor. McConnell then topped off this farce by accusing President Obama of "trying to politicize" this issue.
When testifying before the Financial Crisis Inquiry Commission, Goldman chief executive Lloyd Blankfein defended the practice of marketing securities without telling buyers that it was betting against them, arguing that sophisticated investors could make their own choices. McConnell might argue that his deceptive rhetoric is aimed at voters who are sophisticated enough to make their own judgments about the truth. Let's hope that's right.
Katrina vanden Heuvel is editor and publisher of the Nation. She also writes a weekly column for The Post.