Goldman in the Eye of the Beholder

By Megan McArdle
So the vote on the SEC to bring charges against Goldman broke down by party lines.  Liberals, understandably, view this as evidence of malfeasance.  But of course, there's an alternative interpretation also consistent with these facts: that Democrats brought a weak charge that won't stand up in court because they thought it would help them push through their bank reform.

One piece of evidence in favor of this: none of the people I know who are familiar with securities law think that the government has a strong case; the opinions range from "seriously pushing the envelope" to "give me a break."  And no, these aren't my fat cat friends on Wall Street; they're folks like Economics of Contempt, who has had more than a few harsh words about Republican efforts to stall reform.  It is, of course, entirely possible that I'm missing a lot of top-notch securities lawyers who think the government has a slam dunk.  But there's a plausible argument that the government simply demanded too high a settlement, either because it wanted a political coup, or because it just miscalculated.  Particularly since I think Economics of Contempt is right that Goldman would have been better off settling.  On the other hand, now that the lawsuit's been filed, I'm not sure that's still so.  I'm sure they want to avoid another embarrassment like the Fab Tourre email.  But if they settle now, they're guilty.  If the government loses, it looks bad, and is less tempted to throw its weight around.  If they're willing to endure the bad publicity, they might be better off seeing it through.

To return to the broader political question, I confess, I'm baffled by the Republican opposition to financial reform; it seems politically stupid, and I'm having a hard time seeing the ideological principals that are motivating it.  I mean, I understand the fundraising advantages, but what's the good of having a bunch of money if everyone thinks you're in the pocket of the banks . . . which is, after all, possibly your most effective weapon against Obama?  So there's an argument to be made that even if this indictment is a political stunt, it's necessary in the face of intransigent opposition.

But on balance, I do not find that argument convincing.  Regulatory agencies should not be in the practice of helping serve the political ends of the party in power, no matter how worthy those ends. In practice, of course, they often do . . . think district attorneys around election time.  But we shouldn't encourage it.  To the extent that we want to have anything like a working technocracy, we need those institutions to be as independent from politics as possible.

This article available online at:

http://www.theatlantic.com/business/archive/2010/04/goldman-in-the-eye-of-the-beholder/39255/