Goldman: Villian In Dumbed Down Fable

The media is in a frenzy over Goldman Sachs.

On Friday the Securities and Exchange Commission (SEC) charged Goldman Sachs of securities fraud in a civil lawsuit. The SEC claims that the Wall Street giant deceived clients by selling them a subprime mortgage investment that was intended to fail.

The story has dominated the news over the weekend and today. It is claimed to be a very big deal, a court case that might define the financial crisis era. Yet, in one sense, I find it hard to see just what is so big about it.  Just consider the information we know about the case itself:

So, it is not clear-cut whatsoever that Goldman broke the law, but if it did, it will not be a major offense, nor will the company face a major penalty. Goldman's reputation would be damaged. But, overall, not much will have objectively changed, whatever the verdict.

But in another sense, I get why the Goldman story has caused such a fuss. And it's got nothing to do with the details of the case, which, from what I can tell so far, most people aren't bothering to try to figure out.

The first reason has to do with short-term political expediency. The Obama administration has jumped on the Goldman case to push through its financial reform legislation. Never mind that the reforms do not address the issue at stake in the Goldman case.

The award for rank political opportunism, however, must go to British Prime Minister Gordon Brown. In the midst of the country's general election and his party trailing in third place, Brown took the opportunity to complain about Goldman, even though his government has only an indirect connection to Goldman and the case (Royal Bank of Scotland inherited a loss of $841 million after acquiring ABN Amro, which made the brilliant decision to insure the securities).

As Brown told the BBC: "We need a global financial levy for the banks. We have to quash remuneration packages, such as Goldman Sachs'. I cannot allow this to continue." Note the multiple non-sequiturs: a "global financial levy" has nothing to do with preventing Goldman from creating CDOs or who invests in them; "remuneration packages" reminds people that bankers get big bonuses, but the SEC is not charging Goldman with being overpaid; and the reference to "I cannot allow this..." is just bizarre, as if Brown himself was going to bring Goldman Sachs to justice.

But the real driving force behind the rush to condemn Goldman is - even more than short-term politics - the desire to put a face to a simplistic, conspiratorial version of the financial crisis story. The authorities are presenting us with a morality tale, and Goldman has now been chosen as the big, bad villain. It is as if, unless we find an evil doer committing a crime, we haven't really got to the bottom of the financial crisis.

A New York Times lead editorial states: "We urge everyone to keep a close eye on this case. If it is handled correctly, it should finally answer the question of whether malfeasance "“ and not merely greed, incompetence and weak regulation "“ was also responsible for the financial meltdown." Great: first we were told bankers were greedy; now we're being told they're crooks too. What a tremendous advancement in our understanding of economics.

Deals like the one Goldman is accused of arranging did not cause the financial panic. More generally, Goldman and other investment banks were not the only ones implicated in the financial crisis either. The problem of an overgrown financial sector was (and remains) systemic, implicating non-financial as well as financial companies. And, most importantly in political terms, a proper reckoning would recognize the role that the political class played in facilitating the financial blow-up. Targeting Goldman as the deceptive mastermind has the huge advantage for politicians of diverting attention and blame away from themselves.

The Goldman case will be a big deal, but not because it deserves to be.

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