Apr 21 2010
The SEC strikes again as it issues a Wells notice to Goldman Sachs (GS) for selling CDO’s that were allegedly created to fail. A major hedge fund (Paulson & Co.) was on the short side of the trades and apparently he selected what securities would go into the CDO. I’m just calling it “shady shit.”
A couple of points. First, I’m sure other investment banks did the same thing and it’s not just a “Goldman thing.” Second, GS will pay a fine and sweep it under the rug. Coincidently, talk of financial reforms are doing the rounds on Capital Hill, some say the timing of the Wells notice and government financial reforms was coordinated. Might be.
Personally, I think 2 things would make a difference and a lasting impression. First, instead of targeting specific instruments such as derivatives, a macro view might be a better approach. It would be similar to someone committing a crime with a knife will get XYZ punishment, or if you committed the crime with a gun then its something else. When really you should be targeting the crime itself. Since, Wall Street is really driven by money I think that’s where they should start. Instead of basing a fine on the profit someone made, it should be based on the value of the security. In the Goldman case they should not target the USD 30 million or so that GS made. Instead, they should base the fine on the initial value or ending value of the security (whichever is higher) – USD 1 billion. That changes the dynamics of the risk management team, then everyone is watching everyones back and some dumb ass VP won’t be misrepresenting a USD 1 billion transaction.
Secondly, the Glass-Steagall Act has to come back. It originally stated that commercial banks and investment banks were seperate. In 1999 that act was repealed and the effects of that are pretty obvious – it was like putting Wall Street on a cocaine, alcohol and steroid fueled binge. In addition, they should take it a step further, you cannot trade on behalf of the company (aka prop books). Prop books would have to be spun-off and their P&L managed individually. If anybody thinks that front running does not occur is fooling themselves. Talk of a Chinese Wall is pure garbage, it’s more like Swiss Cheese.
In summary, fines based on the initial or ending value of the security (whichever is higher), bring back the Glass-Steagall Act and ALL prop books have to be standalone units.