The most clichéd, yet satisfying, moment in any movie
comes when the brutally bullying antagonist discovers he’s
lost that which had empowered his abusive nature. Wait…I
take that back. Seeing that fear in the bad guy’s eyes is the
second most satisfying movie moment, the first being the inevitable
administration of long-overdue justice that follows.
Though evidence has mounted for a while, it recently became
official: Goldman Sachs (NYSE:GS) is now on its own, as the
guardian angel/demon that once enabled the firm’s assault on
our capital markets has clearly severed that relationship. At least
that’s the conclusion I draw from the news
that Goldman was censured and fined by NYSE and the SEC for
specific faults in “execution and clearing” (another
way of saying “naked short selling”).
What changed? After all, Goldman is still rich, right?
Well…sort of. Goldman may be flush with cash, but with
pressure mounting on politicians to reject any of it in the
form of campaign contributions, suddenly that cash doesn’t
spend nearly as well as it used to. At the same time,
it’s probably safe to assume Goldman’s allure as a
future client has been severely degraded in the eyes of private
sector career-minded regulators.
In other words, Goldman’s gold has lost its luster, and
with it, the firm’s political ‘juice’.
I can only imagine the look on their faces when Goldman brass first
realized why their calls were not being returned: their power was
gone. And folks with badges were knocking on the door.
Goldman’s role as a facilitator of illegal, short-side
market manipulation will never come to symbolize its villainy in
the mind of the public the way knowingly selling its clients
garbage CDOs on behalf of John Paulson will. But that’s what
makes this latest development even more significant: it suggests a
sort of “piling on” mentality that was inconceivable
just one month ago (keep in mind this is the company that,
evidence suggests, successfully lobbied to have even
legitimate short selling banned once the practice began to
impact its share price). This, in turn, may be an inadvertent
signal from regulatory “insiders” that Goldman’s
prospects of emerging intact from this storm are slim.
Do not mistake the tone of this post for contentment, for this
particular action doesn’t come close to addressing what I
suspect is the true breadth and depth of Goldman’s role in
short-side market manipulations. Indeed, the bulk of this
particular complaint focuses on a few infractions observed over a
few weeks in late 2008. Goldman, for its part, attributes the
problem to an inconsequential bookkeeping error. If that’s
true, a half-million dollar fine for an accounting mistake makes
Goldman’s plight seem even more dire.
In the end, what’s most significant about this complaint
is the insight it provides into how the system works when
inappropriate influence ceases to be a factor in the regulatory
process (something we’ve grown accustomed to not seeing):
investigators investigate, infractions are cited, penalties
applied, juice ignored.
I’m not convinced it’s within human nature to
develop a financial markets regulatory paradigm able to
consistently achieve this ideal (though I’m certain we can do
better than what we’ve got). The alternative is to focus on
the other side of the equation by limiting the capacity of any
market participant to become so influential the rules cease to