I am trying to drill down to what is the point of the whole settlement with Goldman thing. So many of the Wall Street Journal articles were all about who won and who lost. I think that misses the point. I think the point is that this settlement is all about a level of securities transactions that the retail investor never sees. (Thank God for that) or do they??
Let Goldman settle with the SEC. Let the SEC reduce charges from full on fraud to unintentional fraud. That is all fine with me. The real crux of the matter is sending the message that deception no longer is free. (totally nicked this from the WSJ) Also send the message that firms and banks need to be more responsible for the deals they create. Fair enough for that. But this deal concerns institutional investors and their complex and complicated rules.
What is not a factor in this deal is how things need to be reformed for the retail investor. That may be addressed by the Dodd-Frank bill. How do we protect the retail investor from big banks who create these new financial products that create mayhem? I think we are doing it. We pass laws afterwards that try to clean up the mess. And that is it. Consumer protection is a big part of the new financial reform and that is something. We will cover that in another blog.
Retail investors need to see that the capital markets are a force of nature. You cannot control the ocean and you do not want to. The ocean does wonderful things all on its own just like the capital markets. Let them create financial products that no one understands and then we need to respond and regulate it. It is not a pretty process but it just might be the thing that keeps us going as a nation. The financial crisis is unfortunate but we do not hate it enough to stop investing. To borrow from my friend from Bulawayo, Zimbabwe, people are not actually uncomfortable enough to make drastic changes. I think the same is true in the US despite all the media rhetoric.
The problem is not Goldman Sachs per se. It is really the law. We need to fund the SEC even better so that there is an incentive for bright people to work there. Those same bright people are now working for Wall Street firms. We need to create the atmosphere of respect for the SEC. Even more respect is needed. We might have the best level of respect between industry and regulator, but there is room for improvement.
If Goldman is the most law abiding citizen on Wall Street, then we need to alter the law. We need to get back to fundamentals. We need to address compensation and incentivise bankers and investment bankers to comply with the law. We need to show traders that complying with the law is actually better than making tons of $$. How do you do that? I am not sure.
Honestly, I think more people just need to remember everything they learned in kindergarten. http://www.peace.ca/kindergarten.htm
http://www.propublica.org/blog/item/what-the-goldman-sachs-settlement-means-in-context
http://www.huffingtonpost.com/2010/07/15/goldman-sec-talk-all-in-o_n_647693.html
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