The Fishy Timing of SEC v Goldman

The regulator's timing is perfect, given the state of financial reform in Washington. Maybe a little too perfect?

Imagine if, during the climax of the health care reform battle, the much loved-comedic actress Reese Witherspoon was learned to have lost her fortune. And that wasn't all: she had contracted a rare, aggressive -- but curable -- illness. She then died, because she didn't have health insurance. Reform advocates would have seized the moment to declare Witherspoon's death a travesty of justice. Her death would serve as the perfect example of a good, hardworking American with a family that died due to the U.S. health care system. Public opinion of reform would likely have even ticked up a few points, benefitting from real reminder of the dangers of not passing health care legislation.

SEC v Goldman is financial reform's Reese Witherspoon.

And that's suspicious. In the example above, you can almost imagine conspiracy theorists wondering if health care supporters had staged Witherspoon's death to garner support for reform. So naturally, Republicans have begun suggesting that the White House has something to do with the SEC's newfound passion for prosecuting the most prominent investment bank. After all, the SEC chairperson does answer to the President. Of course, the White House denied it had any advance knowledge of the complaint.

It's hard to imagine better timing. The financial reform debate is finally hitting Main Street after brewing in the halls of Congress and the Treasury for months. Democrats and progressive groups are trying to get average Americans riled up about regulating Wall Street. The Senate could begin formal debate on the floor as soon as this week.

And it won't be an easy battle. While there appears to be some consensus in Congress that reform is necessary, the details are highly controversial. And last week, top Republicans made clear that they were ready for a fight. Then, the SEC accused Goldman of fraud related to selling unsuspecting investors complex securities destined to fail. The case looks pretty strong -- if the SEC's facts are proven accurate.

So perhaps the SEC's case is entirely legitimate and just happened to bring it now, but the timing is a little hard to believe. The following revealing, and somewhat troubling, paragraph from an article in the Wall Street Journal raises some questions:

Firms typically get a chance to settle such suits, but not in this case, Goldman said. The Wall Street giant said it was alerted to the probe in the summer of 2008 and was warned that it might face a suit in July 2009. It says it then responded in detail to the Securities Exchange Commission's inquiry in September, but heard nothing back from the government until Friday's unveiling of the civil suit. The SEC usually notifies firms ahead of a lawsuit as a courtesy to give them a chance for a last-ditch settlement or to prepare for the public fallout.

Why No Opportunity to Settle?

If the SEC often settles such cases with banks and investment firms, why wasn't Goldman provided the same opportunity? This implies that the SEC had some motivation for treating Goldman differently here than it would most defendants.

Why Now?

The probe started back in 2008. The SEC has had all the information it needed from Goldman since September. Why, seven months later, is Goldman finally being sued? That seems like a long time to formally charge a company after it has responded to an inquiry.

Why Goldman?

Indeed, there's little doubt that the SEC has been investigating dozens of cases like the one involving Goldman. There are a lot of angry investors out there who claim they were taken advantage of by crafty bankers peddling tricky securities like those involved in this suit. Why not pursue one against Merrill Lynch or Deutsche Bank?

Why a synthetic CDO?

There were a slew of toxic securities released into the market during the housing boom. Subprime mortgage-backed securities are possibly the most famous. Collateralized debt obligations were the bonds of bonds that often depended on those MBS and consequently suffered. But synthetic CDOs are perhaps the kings of complexity. They're securities created by structuring bonds to pay based on the cash flows of other bonds, loans or securities. That makes them part derivative, part MBS, and all Byzantine.

So it just all seems a little too perfect. Perhaps financial reformers really are just that lucky, and there's no conspiracy here involving the SEC intentionally releasing its dream case as the financial reform debate was at its boiling point. Or maybe we will learn the real story in the days that follow.