Financial reform advocates were practically shaking with excitement to utter their I-told-you-so's over the weekend after the SEC filed a lawsuit (.pdf - brief synopsis here) against Goldman Sachs for fraud. One example of a reformer with a triumphant tone came this morning as House Financial Services Chairman Barney Frank (D-MA) said that the case helps reinforce the need for more regulation of financial markets. Should it?
To be sure, having a major investment bank sued by the SEC strengthens anti-Wall Street rhetoric. In that way, it will enhance public support for measures to crack down on banks and discourage politicians from looking the other way -- and the timing couldn't have been better. So politically, the event is extremely helpful. But that's different from saying that the content of the SEC complaint assists regulation proponents in defending the more controversial reform proposals.
If the SEC Wins
An SEC win might seem like it would strengthen the case for reform. It shouldn't. If the SEC succeeds in showing that Goldman committed fraud, then that means current law already forbid Goldman's alleged bad behavior. In other words, no further regulation would be necessary to right the wrongs committed by the investment bank in this case.