The humbling of Goldman Sachs

Karma has finally caught up with Goldman Sachs and bitten it in the ass.

On Tuesday, the Wall Street firm, which had once seemed impervious to the free-fall financial crisis, saw its stock tumble after it announced lower-than-expected earnings.

The drop in earnings — a full 83 percent from the first quarter — comes as a result of market volatility, reformed trading and a costly Securities and Exchange Commission settlement worth $550 million.

This settlement is only a baby step in the right direction, and more needs to be done to seek restitution against Goldman, whose despicable acts defrauded government officials, the American public and its own clients.

The SEC, whose reputation was tarnished in the wake of its failure to stop fraudulent operations like Bernard Madoff’s $50 billion Ponzi scheme, finally bucked up and did some policing when it filed a civil fraud lawsuit against Goldman in April for misstating and omitting facts about a mortgage-related investment vehicle called Abacus.

Goldman Sachs trader Jonathan Egol created Abacus to protect Goldman from potential investment losses if the housing market were to decline. These securities are synthetic collateralized debt obligations, which represent leveraged bets that can potentially have large payouts without requiring actual funds be set aside.

Specifically, Abacus consisted of mortgage-related bets, which were strongly marketed and sold to Goldman’s clients.

Having sold these toxic securities, Goldman then made bets against the same securities by selling them short. This means Goldman would profit if the securities they sold as solid investments to their clients were to decline.

And gosh, did they ever decline.

Since these securities directly related to the credit-default-swap market and the housing market, they crashed when the subprime mortgage fiasco threw the world economy into a full-fledged recession in 2008.

As such, Goldman made money hand over fist while its clients lost billions upon billions in their investments.

Selling short not only made Goldman even richer, but it also pushed the economy further downward by continuing to depress prices and the stock market. These nefarious securities turned Goldman into a casino and its clients into gamblers. And like always, the house won. Goldman issued about $10.9 billion worth of Abacus securities between 2004 and 2008.

Goldman’s actions were not only irresponsible in the markets, but dangerous to its own clients as well. As such, the company swallowed its pride and admitted a mistake on its part in the settlement agreement.

Using the money swindled from its clients, Goldman paid out dividends and exorbitant bonuses — the average being $500,000 per employee. These financial incentives fostered the duplicitous and greedy mindset that will hopefully be enervated by the SEC lawsuit.

Yet more can be done to prevent financial titans like Goldman from defrauding their customers and ruining markets.

We need to adopt an employee bonus tax similar to that of the United Kingdom. This would tax employee bonuses significantly, which would hopefully keep employees focused on providing better services and products rather than ways to steal from their clients.

Citigroup, JPMorgan Chase and Bank of America paid out more than $1 billion dollars during the second quarter toward the UK employee bonus tax. If we adopt a similar tax, we are looking at billions of dollars going to the federal government rather than expensive yachts or private jets for rich bankers.

Hopefully, some of that money could go to the deserving SEC so it can stay on the lookout for more corporate corruption — which seems to be flowing endlessly from Wall Street these days.


E-mail: yzchaudh@indiana.edu