By Sen. Ted Kaufman
America has learned too well that hubris on Wall Street runs deep -- it is a rare trader who will admit that anyone has bested him or her in any transaction or negotiation. So it is no surprise that Wall Street players believe Goldman Sachs got the better part of the deal when it settled the securities fraud case against it by the Securities and Exchange Commission for a mere $550 million, about 4 percent of Goldman's profits last year.
I see it differently.
First, after years of lackluster leadership and ineptitude, the S.E.C. is back on the beat. And its new cops -- Robert Khuzami and his team at the enforcement division -- are exceptionally talented, motivated and determined to restore effective deterrence against Wall Street malfeasance. Attorney General Eric H. Holder Jr., the Justice Department's criminal division, and the United States attorney offices in the Southern District of New York, Eastern District of Virginia and elsewhere are similarly motivated to root out and prosecute financial fraud.
Second, Goldman Sachs represents the ultimate in a sophisticated, powerful defendant with access to armies of the best lawyers and deepest pockets to defend any case. The S.E.C. took the firm on for good reason and, whatever you might think about the deal, no one should believe Goldman walked away with anything less than a very bloody nose.
Goldman admitted to failing to disclose the role of John A. Paulson in selecting the makeup of the collateralized debt obligations that his hedge fund was betting against; it agreed going forward to review its marketing materials for certain offerings (and acknowledged it is conducting a comprehensive review of its business standards); and it suffered a tarnished reputation that it may never fully restore. As Mr. Khuzami has said, paying a $550 million fine on a transaction that Goldman claims led to a profit of only $15 million is not a savvy risk-return ratio.
Third, the investment by Congress in the Fraud Enforcement and Recovery Act -- which authorized an additional $165 million for more F.B.I. agents and prosecutors to go after the financial fraud that was at the heart of the crisis -- has already been repaid in full. Of the $550 million fine to be paid by Goldman, $300 million will go straight to the United States Treasury (the balance goes to harmed investors).
Fourth, those on Wall Street who have gloated in recent days that the conclusion of the Goldman case may put an end to fraud enforcement against major Wall Street actors may want to think again. Neither Mr. Khuzami nor the Justice Department is permitted to discuss with me or anyone else in Congress their pending investigations, nor have they, but I am confident that the pipeline is not empty.
After all, Senator Carl M. Levin's Permanent Subcommittee on Investigations has uncovered evidence of fraud all along the origination-underwriting-securitization chain -- starting with "liar loans" and ending with fraudulently marketed collateralized debt obligations. In addition, the world now knows that Lehman Brothers, Bank of America and other major banks routinely engaged in end-of-quarter window dressing of their balance sheets by hiding billions of dollars in liabilities.
As Mr. Khuzami testified to Congress during a hearing that I headed, complex financial fraud cases are extremely time-consuming and difficult to bring, because sophisticated defendants know how to cover their tracks as they go. Regardless, we need Wall Street actors to feel it in their bones, as Prof. James Galbraith has put it, that illegal activity will be prosecuted to the full extent of the law.
As I said on the Senate floor on March 15, it is high time that we return the rule of law to Wall Street, which has been seriously eroded by the deregulatory mindset that captured our regulatory agencies over the past 30 years. We became enamored of the view that self-regulation was adequate, that rational self-interest would motivate counterparties to undertake stronger and better forms of due diligence than any regulator could perform, and that market fundamentalism would lead to the best outcomes for the most people.
Transparency and vigorous oversight by outside accountants were supposed to keep our financial system credible and sound. Instead, an era with no effective regulation or law enforcement led to the biggest financial crisis since 1929 and an economic disaster for the American people. And we know that fraud and lawlessness were at the heart of it.
Congress must continue to concentrate law enforcement and regulatory resources on restoring the rule of law to Wall Street. I am proud that the S.E.C. has begun this task. We must treat financial crimes with the same gravity as other crimes, because the price of inaction and a failure to deter future misconduct is simply a price America can never again afford to pay.