Reforming Wall Street in the Shadow of Goldman vs. SEC

How the civil suit changes the dynamics of reform

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The iron is hot and Democratic lawmakers know it. Fraud charges leveled against Goldman Sachs by the SEC couldn't have come at a better time for Democrats trying to pass sweeping financial reform. It plays into their narrative that reform is needed to protect ordinary citizens exploited by money-grubbing Wall Street firms. But does the bill, sponsored by Banking Committee Chairman Chris Dodd, fulfill that promise?

Its key provision is a $50 billion fund—paid for by banks—that would carry out the liquidation of failing banks that pose a systemic risk. Here's what business and economic writers think:

  • Politically, This Is Dangerous for Both Parties, writes Peter Nicholas at The Los Angeles Times: "Republicans have been notably successful in mounting populist attacks on the administration, even framing the pending legislation that would increase regulation of Wall Street as a recipe for perpetual bailouts by taxpayers. Now the Goldman case gives the administration a chance to send a countervailing message that government intervention is essential in the face of unregulated trading that favors well-connected insiders... But Obama has vulnerabilities of his own. Goldman Sachs employees contributed nearly $1 million to his 2008 presidential campaign, the second-largest source of his donations, according to the Center for Responsive Politics."
  • Pass This Reform Bill Now, urges Paul Krugman at The New York Times: "The obvious question is whether financial reform of the kind now being contemplated would have prevented some or all of the fraud that now seems to have flourished over the past decade. And the answer is yes."
  • We Need Reform—But Not This Bill, writes The Wall Street Journal editorial board: "We have had our own disputes with Goldman, and we've criticized the firm for its explanations of its dealings with AIG. We have also urged the Senate to rewrite its flawed financial regulatory-reform bill precisely because it would benefit Goldman and other giant banks with explicit bailout powers available to assist them. There are serious questions about the role of Goldman and other too-big-to-fail banks in the American financial market. Yet this case addresses none of these questions."
  • Reform Might Not Rein in Hedge Funds, writes Stephen Gandel at Time: "So far, hedge funds have been able to avoid scrutiny in the wake of the financial crisis. The financial-reform bill does require hedge funds that have $100 million or more in assets to register with the Securities and Exchange Commission. That's better than the current system where hedge funds can volunteer to register with the SEC but are under no requirement to do so. But hedge funds are not required to report their holdings on a regular basis in the same way that mutual funds or pension funds are. And registration alone doesn't seem to be enough to keep an eye on hedge-fund activity. Paulson's fund registered with the SEC starting in 2004."
  • Enforcing Laws Needed More than Reform writes Matt Taibbi at True/Slant: "There is some good stuff in the bill, but it is riddled with loopholes. Far more important than the actual bill is the effort to actually enforce existing laws. While it is true that the near-complete absence of a regulatory structure to oversee derivatives trading is problematic, there is a lot the government could have done still, if it had wanted to, to prevent catastrophes like AIG and Lehman Brothers."
  • Reform Must Change Wall Street's Values, writes Roger Martin at The Daily Beast: "Under the current [rules], the folks who make the most money in America create zero value. These traders—like John Paulson—just shuffle existing value from one entity to another; they don't build net value. Yet our society rewards them most; more than we reward builders of value."
This article is from the archive of our partner The Wire.