July 17, 2010


Bill Black: SEC fine against Goldman is no deterrence, it will all happen again
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GOLDMAN 'TOO BIG TO PROSECUTE'PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington. And in Washington, the Securities and Exchange Commission announced a deal it had made with Goldman Sachs. Now to help us understand this deal better is Bill Black. Bill is associate professor of economics and law at the University of Missouri–Kansas City. He's a specialist on white-collar crime and is the author of the book The Best Way to Rob a Bank Is to Own One. Thanks for joining us, Bill.


JAY: So, quickly, what's your headline take on this deal with Goldman?

BLACK: It's the largest fine in SEC history, and that's the bad news.

JAY: Why do you mean that?

BLACK: Well, because it shows how ineffective the SEC has been for decades now, as these losses caused by securities fraud have grown into the multi-billion dollars. The SEC not only didn't bite, but it forgot that it had teeth and what it's supposed to do with them.

JAY: Well, Marian Wang of ProPublica put the fine into some context for us. So let me just quote a little bit of her article. So the fine is $550 million Goldman Sachs has to pay, and as you say, it's the largest ever penalty paid. But according to this article in ProPublica, it's only "about eight times what the head honcho has taken home in a year. In 2007, [the year] Goldman did the deal at the center of the SEC suit, CEO Lloyd Blankfein took home $68 million." The fine's "just a touch less than a Goldman charitable donation." They gave away $500 million, apparently, in 2009, which was to help small businesses. "It's less than a tenth of the gain Goldman's stock had today [July 15]" as a result of the deal. "It's about two weeks' worth of profit. . . . It's a sum that Goldman could pay immediately"—and probably a hundred times over, Wang says. So the fine, when you put it into the context of the kind of money Goldman makes, is not even really a slap on the wrist, I suppose.

BLACK: Right. It depends on what you're trying to achieve. If you're trying to achieve compensation for the victims of the fraud—in this deal, by the way, a large part of the money doesn't go to the US taxpayers; it goes to two massive financial institutions in Germany and United Kingdom/Scotland, who were the primary victims of this fraud—well, then it compensated them for the losses. If you are trying for deterrence to prevent not just this specific fraud but take the money out of frauds in the future, then you have to factor in the fact that you're not going to fine most of the frauds. And so your fine, when you do detect a fraud, must be much greater than that which is required to compensate the particular victims—you're talking on the order of 10 to 20 times that. If you measure it in terms of deterrence, this is very, very weak; it's not going to have any significant deterrent effect. If you measure it in terms of compensation, well, then it's pretty much full compensation.

JAY: Now, one of the provisions of the deal is Goldman did not have to admit that they had done anything wrong. So they're—this really doesn't establish a precedent.

BLACK: Yeah. Now, this is a really dysfunctional part of the Securities and Exchange Commission, and has been dysfunctional for most of its existence. The SEC doesn't actually litigate cases. It settles. And then it settles in this bizarre way in which no one has to admit anything. Indeed, this is an unusual deal, the one with Goldman, because Goldman made a kind of admission—I say "kind of admission" because it was obviously crafted to minimize any legal effect. So Goldman admits that it was a "mistake"—and I'm quoting the word from the deal—a "mistake" not to have disclosed the fact that this portfolio they were selling their customers was chosen for the purpose of destroying their customers. Well, yeah, that's quite a mistake. But what you really needed was an admission that said this was a deliberate decision by Goldman to fail to disclose information that was highly material to the investors. That would have allowed the civil suits to take advantage of that admission by Goldman. Now everything has to be litigated again in the civil suits by private parties at immense expense. And you know what's going to happen is that the businesses are going to go, oh, see those rotten private lawyers and all the litigation? Well, if the SEC simply did it's job—sued, established the facts, got the precedents—then we could dramatically reduce fraud going forward. Instead, they're still locked in this world, as they say that they're supposed to be the junkyard dog protecting us. But they've forgotten that it's even their job to bite people, and they've forgotten that they have canines.

JAY: Now, just to put this in perspective, and just to remind people of our earlier interview we did together, you've said that people should imagine that there are people sitting in the head offices of these investment banks, knowingly selling financial products to their customers—and they're not always just big banks on the other side; sometimes they're pension funds and other kinds of clients—knowingly selling stuff that they had manipulated a AAA rating that they knew was absolute junk. And, essentially, according—you know, you've been saying this was really a deliberate fraud. So if—you've been raising the issue not just as some kind of civil case and fine; you've been asking, why no criminal charges? Are we anywhere further towards criminal charges?

BLACK: No. This agreement, for example, doesn't require explicitly the cooperation of Goldman with the Department of Justice. It does require the cooperation of Goldman with the Securities and Exchange Commission in their civil investigations. But, yeah, the dog that still won't bark. You know, for all my criticisms of the SEC, at least they did something, and the fine is, you know, far from trivial. But the Justice Department has done nothing in a case that involves not just a fraud, but a fraud designed to blow up your customers. And, of course, the broader question is: what about the markets? Why is it the government that has to take action? The markets now know that Goldman Sachs engaged in conscious fraud for the purpose of transferring losses to its customers. So you have to ask yourself why anybody goes to Goldman Sachs. In the trade, this is known as blowing up your customer. You know? It was written about in Michael Lewis's famous book about liar's poker. We've known it for at least 20 years. Wall Street is incapable of cleaning up its act. And that act isn't just immoral; it's not just civilly wrong; it is outright criminal.

JAY: So I guess one argument you would get from the Obama administration, that if you go after Goldman and others like that with the kind of vigor you're proposing, you shake the confidence of the world and the American banking system, and, you know, for the national interest you can't do any of this. I don't know if they say it explicitly, but I think that's more or less what they believe, or at least what they say. What do you make of the argument?

BLACK: Well, indeed, the Republicans are expressly making that argument right now, calling—[John] Boehner called yesterday for the repeal of the financial reform bill, saying that it was going to shake the confidence of people in the banks. So, yeah, you're quite right. Now, by the way, minutes apart, he says it's terrible that the financial reform bill doesn't deal with too-big-to-fail, and then, of course, he adopts too-big-to-fail by saying we can't take on these big frauds because it would disrupt the economy.

JAY: So too-big-to-prosecute.

BLACK: Too big to prosecute, indeed. I was supposed to be interviewed yesterday by Bloomberg. So I was, you know, in the studio with my ear bug in, listening to the broadcast, and the commentators were hilarious. They referred to this as the "crucifixion" of Goldman Sachs. And they used another word—it wasn't vendetta, but it was something very similar. So, you know, the idea that this fine, which, as you say, represents two weeks of profits at Goldman Sachs, is some kind of rapacious government out to get powerful interests, well, of course, that's ludicrous. Exactly the opposite. The powerful interests still have a large degree of immunity. None of them still have been even indicted. There's not a single indictment of one of the really big players. And it was only two weeks ago that you had the first indictment of a middle-tier player, and even that was a specialized circumstance, because they found him trying to rip off the TARP fund. So they didn't really focus on this underlying fraud that helped cause the mortgage crisis.

JAY: Is part of what's going on here a little bit of smoke and mirrors? What I mean by this is, like, Warren Buffett said about this particular case, this suit of the SEC over this particular deal, they have paid a fine, that they're big boys on both sides of the equation, they all knew what they were getting into, and really Goldman didn't need to inform them. They had every—the European banks had every ability to do their own due diligence. But by making this the issue, I'm saying, and fining them for this, what they're really doing is giving the public a kind of window dressing—"we've gone after Goldman"—where the bigger, systemic problem that Goldman and others were involved with is still in existence. And we'll get to this in another segment. But the finance reform bill really won't stop either.

BLACK: Certainly it's true that the case, if you were looking as a litigator (and I used to litigate this type of thing), you would see, if you were the SEC, that your key weakness is exactly what Buffett said: the primary victims were very large financial institutions, and yes, they certainly can conduct due diligence. Now, that doesn't mean that it isn't fraud, because Goldman Sachs deliberately kept them from learning something which was not just material but central to any investor's decision making, and that was: this portfolio of toxic mortgages that they were investing in had been chosen by John Paulson—no relative of Henry Paulson—precisely because it was the worst stuff that he expected to fail very, very quickly; and we know that Goldman had the same view. And so the communications show John Paulson and Goldman rushing to get this deal done because they feared that the collapse of this toxic waste stuff was going to be imminent, and they wanted to get out there and blow up their customers before it happened. Now, you know, that is awful. But that's just one deal. Goldman did hundreds of deals in selling this product, and folks other than Goldman did far more than Goldman did. So, yeah, the real question is: where are the prosecutions, where are the civil suits and enforcement actions against this massive fraud which was the sale of toxic waste as if it was pristine, nearly risk-free assets?

JAY: So there's nothing in this deal that will stop it from happening again.

BLACK: No, because that would be deterrence, and we can agree that if this was supposed to deter, its impossibly too weak to produce substantial deterrence.

JAY: Thanks for joining us.

BLACK: Thank you.

JAY: And thank you for joining us on The Real News Network.

End of Transcript

DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


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