Goldman Sachs case likely to increase calls for Wall Street reform


Goldman Sachs Group Inc. was once a darling in Washington, handing out millions of dollars in campaign contributions and supplying so many executives for key federal positions -- including two recent Treasury secretaries -- that some people called the firm “Government Sachs.”

But the Securities and Exchange Commission’s allegation of fraud in Goldman’s marketing of mortgage-backed securities is exacerbating the Wall Street firm’s already substantial PR woes in the wake of the financial crisis and its receipt of $10 billion in bailout funds.

The case also is likely to not only further diminish the firm’s already weakened influence in the capital but also fuel efforts by the Obama administration and congressional Democrats to pass the most sweeping overhaul of financial regulations since the Great Depression.

“When Goldman Sachs and their friends come into Congress and say, ‘Leave us alone. You don’t need to regulate us,’ I think that argument becomes weaker and weaker,” said Sen. Bernard Sanders (I-Vt.), a strong supporter of tougher financial regulation.

Lawmakers from both parties scrambled Friday to use the case against Goldman to their advantage.

Democrats said the allegations showed the need for their regulatory proposals, particularly for a provision opposed by Goldman that would increase transparency in the trading of derivatives, the complex securities at the center of the SEC charges.

“We don’t need to know the outcome of this case to know that the opaque nature of unregulated asset-backed securities fueled the financial crisis,” Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) said. “We must pass Wall Street reform to bring practices like these into the light of day and protect our economy from another devastating blow.”

House Minority Leader John A. Boehner (R-Ohio), meanwhile, depicted Goldman as one of Obama’s “Wall Street allies” and “a key supporter” of a part of the legislation that would create an industry-paid fund to cover the cost of future seizures of large financial firms. Boehner and other Republicans said those seizures would turn into bailouts.

It already had been a precipitous fall for the Wall Street firm, a power player on Wall Street and in Washington for years.

Since 1989, the company’s employees have contributed $31.6 million to federal political candidates, more than any financial firm, the nonpartisan Center for Responsive Politics said. About two-thirds of that money has gone to Democrats, including nearly $1 million to Obama during his 2008 presidential campaign, the company’s top recipient during that election cycle.

Democrats and Republicans have tapped former Goldman executives for key financial positions. Robert Rubin, a former Goldman co-chairman, served as Treasury secretary under President Clinton. Former Goldman Chief Executive Henry M. Paulson held the Treasury post under President George W. Bush from 2006 to 2009.

But when the financial crisis hit, Goldman’s reputation began sinking.

“In Washington and in the country as a whole, all of the industry’s leaders have been tarred by this crisis and Goldman, because it’s been so successful in many ways, has suffered worse than the others in terms of their reputation,” said former investment banker Douglas Elliott, an economics fellow at the Brookings Institution.

The company also has been hammered for recovering all $14 billion it was owed from American International Group Inc. after the insurance giant was bailed out. Critics, calling the payment a “backdoor bailout,” claimed that Goldman’s connections with Paulson were behind that outcome.

Treasury Secretary Timothy F. Geithner was pummeled during a recent congressional hearing for hiring a chief of staff who had worked for the firm. And when top Wall Street executives went before the bipartisan commission investigating the financial crisis in January, the panel’s chairman focused his fire on Goldman Sachs Chief Executive Lloyd Blankfein, comparing him to a shady car salesman.

Goldman converted to a bank holding company during the crisis, allowing it to receive $10 billion in federal bailout money. Even though the company repaid the money in June -- and the government turned a 23% profit on its investment in the firm -- the criticism has continued.

Goldman’s soaring profits since the crisis helped trigger complaints that Wall Street, after causing a deep recession, had returned to normal while Main Street still suffered.

Obama has seized on that anger, calling Wall Street executives “fat-cat bankers” and proposing a new tax on the industry to recover about $100 billion in projected losses in the government’s bailout fund.

Speaking Friday at the White House at the start of a meeting with his outside economic advisors, Obama didn’t mention Goldman by name, but he said his overhaul was needed to corral Wall Street excesses. He also said he would veto any bill that did not include tough new rules on derivatives.

“Never again should American taxpayers be forced to step in and pay the price for the irresponsibility of speculators on Wall Street who made risky bets, with the expectation that the taxpayers would be there to break their fall,” the president said. “And we can’t leave in place a tattered set of rules that will allow another crisis to develop, without the tools to deal with it.”

The SEC allegations will cause Goldman’s influence in the capital to “take a hit,” said Melanie Sloan, executive director of Citizens for Responsibility and Ethics in Washington, a watchdog group.

“It’s one thing for people to say bad things against Goldman Sachs and think bad things,” she said. “It’s another thing to have fraud charges filed against them.”