Tags: Fraud | Charges | Goldman | Obama | Bank | Reform

Fraud Charges Against Goldman Bolsters Case for Obama’s Financial Reform

Friday, 16 Apr 2010 03:53 PM

 

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Fraud charges filed by federal regulators against Goldman Sachs on Friday immediately added momentum to the push on Capitol Hill for U.S. financial regulation reform.

A sweeping reform bill was expected to come to a vote soon in the Senate. The Democratic bill, backed by President Barack Obama, would slap new restraints on large firms like Goldman.

The Goldman case centers on a collateralized debt obligation, a debt instrument that was based on securitized subprime home mortgages. The securitized debt market is directly targeted by Democratic reform proposals.

"This is another example of how risky Wall Street behavior puts our nation's financial system in peril and further illustrates the need for the strong reform that my legislation provides," said Senator Blanche Lincoln in a statement.

Lincoln, who is chairman of the Senate Agriculture Committee, unveiled a bill on Friday cracking down on the unpoliced over-the-counter derivatives market. Her bill will likely be folded into a broader Senate bill.

"The timing of this works out well to get some legislation done ... it gives (lawmakers) another arrow in the quiver," said Jason Tyler, a senior vice president at asset management group Ariel Capital Management.

The House approved its financial reform bill in December. It would have to be merged with whatever the Senate produces before a final bill could go to Obama to be signed into law. Analysts say that could happen by midyear.

As news of the Securities and Exchange Commission's lawsuit against Goldman broke, senators vowed support for the SEC and determination to bring lawbreakers to justice after the worst financial crisis in generations.

"These are complicated cases that take time to develop.

However long it takes, whatever resources the SEC needs, Congress needs to continue to back the SEC and the Justice Department," said Democratic Senator Ted Kaufman.

Goldman was charged with fraud by the SEC over the structuring and marketing of the CDO. The SEC alleged that hedge fund Paulson & Co worked with Goldman in creating the instrument and stood to benefit as its value fell, costing investors more than $1 billion.

Fabrice Tourre, a Goldman vice president who the SEC said was principally responsible for creating the product, was also charged with fraud. Paulson has not been charged.

The lawsuit, filed in Manhattan federal court, marks a dramatic expansion of efforts to hold people and companies accountable for the 2007-2009 crisis that tipped the economy into a deep recession and unleashed a drive for reforms.

"While its action was slow in coming, I applaud the SEC for finally beginning to deal with the illegal behavior of major Wall Street firms which, in my view, knowingly sold junk products and as a result helped cause the worst recession since the 1930s," said independent Senator Bernie Sanders.

Democrats pushed their reform bill through the Senate Banking Committee last month and are now trying to round up enough Republican support to win approval in the full Senate.

"Whatever reform financial services investors were bracing for, this could be the impetus to speed it up and perhaps give it more teeth and what does that do to the profitability of Goldman and others going forward?" commented David Dietze, president of Point View Financial Services.

© 2014 Thomson/Reuters. All rights reserved.

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