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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

April 16, 2010 at 9:30 AM

Pop quiz: Goldman faces charges, the market falls, do average investors matter?

Goldman Sachs is charged with subprime mortgage fraud and the Dow plummets. What are the big players who move markets telling us? That alleged fraud is such an essential part of the market that without it one must hit the “sell” button?

In fact, getting to the bottom of the swindles, bad behavior and illegality that helped bring us close to a second Great Depression is essential to the health of the market. A market, that is, that generates capital for productive, job-creating activity and gives every investor fair, transparent and sound investment products. The Obama Justice Department, led by former high-powered corporate lawyer Eric Holder, has been bashful and late in prosecuting the obvious crimes that led to the Great Panic of 2008 and cost American taxpayers hundreds of billions of dollars. Its predecessors in the Bush administration were far more aggressive in going after Enron, WorldCom, Qwest, HealthSouth, etc.

Goldman is charged with failing to disclose critical information to investors about a complex collateralized debt obligation backed by subprime mortgages. A hedge fund “with economic interests directly adverse to investors in the (CDO), played a significant role in the portfolio selection process,” according to the SEC complaint. The hedge fund boyz were betting against the investors who purchased the Goldman CDO. Even if those investors were large institutions, many of their customers were real people whose livelihoods were at stake. Goldman said the charges are unfounded.

Activities such as this — and the reporting on other alleged frauds is legion, plus the AIG double-dealing and conflicts of interest — have destroyed countless lives of average Americans. Foreclosures, layoffs, companies killed, huge sums of taxpayer money laid out to save the big Wall Street banks and help shadow banking profits. This is neither a small misunderstanding, nor a private matter among the toffs (“move along, nothing to see here”).

The stock market has been driven lately by hot money, low interest rates and cheap dollars, as well as the federal bailout. Unfortunately, it’s not just a rich person’s game. Millions of average Americans lack the safe and stable pensions of my parents’ generation, and are forced to rely on 401(k)s and other investments on Wall Street for their retirement. Even the remaining pensions are at the mercy of the hedge fund boyz who make up so much of the barely regulated shadow banking system.

Hearings before Congress and the results of the Financial Crisis Inquiry Commission will be helpful in crafting new laws and making regulators actually…regulate. But until the civil and even criminal justice system starts to dig through the piles of fraud and shabby practices, we’ll just be setting up the next big market meltdown. And next time, we won’t have the wherewithal to stop the disaster. If the big players are afraid, that’s telling.

Today’s Econ Haiku:

Great minds in banking

“Senator, I can’t recall…”

Got their big pay, though

Comments | More in Bailout, Stock market


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