Goldman Sachs SEC case: Is it all about politics?

The Goldman Sachs SEC case, filed Friday, comes as President Obama makes a push for Wall Street reform in Congress.

By , Staff writer

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    SEC Chair Mary Schapiro, Fed Chairman Ben Bernanke, and Treasury Secretary Timothy Geithner testify before the House Financial Services Committee Tuesday in Washington. The Goldman Sachs SEC case comes just as Obama seeks Wall Street reform in Congress.
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Republican lawmakers on Tuesday raised concerns that the lawsuit in the Goldman Sachs SEC case, filed on Friday, may be more about politics than securities law.

Whether or not that assertion is true, what's undeniable is that regulators have alleged fraud at Goldman just as President Obama is making what he hopes will be a final push to win passage of Wall Street reforms by Congress.

What's more, the Securities and Exchange Commission (SEC) filed the case only after a 3-to-2 partisan vote, with Republican commission members opposing the action.

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“The events of the past five days have fueled legitimate suspicion on the part of the American people that the Commission has attempted to assist the White House, the Democratic Party, and Congressional Democrats by timing the suit to coincide with the Senate’s consideration of financial regulatory legislation,” Rep. Darrell Issa of California wrote in a letter Tuesday to SEC chairman Mary Schapiro.

Even as Republicans sought to raise doubts about the SEC, however, Goldman itself faced new pressure Tuesday. Britain's Financial Services Authority (FSA) said it has launched its own investigation into Goldman Sachs International, after Prime Minister Gordon Brown lamented Goldman's "moral bankruptcy" in a weekend interview.

Mr. Issa, writing for himself and other Republicans on the House Oversight and Government Reform Committee, said Americans “have a right to know whether the Commission ... may have violated federal law by using the resources of an independent regulatory agency to promote a partisan political agenda.” He called for the SEC to release various records related to the case within a week.

Whatever the SEC's motivation, the sparring on Capitol Hill is a reminder that the stakes in the lawsuit are in many ways political. The impact on the debate over financial reform is the most obvious example.

The SEC faces its own political pressure – to prove it is on the case of protecting investor interests. The agency is under scrutiny not only because of its role as a Wall Street cop as the financial crisis emerged, but also for failure to catch Ponzi schemes such as those of Bernie Madoff and R. Allen Stanford.

SEC Chairman Schapiro said Tuesday the agency was "absolutely not" basing its decision on politics, the Associated Press said. In filing the case Friday, the commission said it was also pursuing other possible lawsuits related to the role of complex investment products in the financial crisis.

Goldman Sachs, too, has more at play than just whether the civil lawsuit results in fines or other penalties. Its reputation as the largest and most successful Wall Street investment bank could be at risk. In a business where client relationships and trust mean everything, the SEC is alleging that Goldman failed to disclose material information in one investment deal it set up for clients.

The firm reported strong earnings Tuesday morning, but chief financial officer David Viniar emphasized something much more basic than a $3.46 billion quarterly profit. "Our clients will continue to support us as long as we provide very good service to our clients," he said on a conference call with investors and stock analysts. "We're still doing that."

Goldman's ability to make profits – and to distribute large bonuses to its partners – is also heavily dependent on the regulatory climate in Washington. No Wall Street firm has stronger ties to US politics (two of its recent CEOs have served as Treasury Secretary, while another has been New Jersey governor). Now the political currents seem to be running against firm and Wall Street in general due to the financial crisis and unpopular bailouts.

The lawsuit comes as Wall Street banks including Goldman have been seeking to influence the shape of financial reforms, which Mr. Obama says are needed to prevent future financial crises.

To some financial professionals, the timing of the lawsuit appears to be no coincidence.

"The administration is trying to pass financial regulation reform before the election, and it can’t hurt to let Wall Street know that lobbying against it can be hazardous to your corporate health," Joseph Calhoun of Alhambra Investment Research wrote in a commentary over the weekend.

Goldman's stock value fell 3 percent Tuesday, following double-digit losses in the immediate wake of the SEC suit.

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