The SEC’s enforcement action against Goldman Sachs will deepen the “mistrust among investors that the market is rigged against them,” according to Jeff Cox in his recent CNBC post, especially if it is shown to be part of a systemic moral bankruptcy of major Wall Street banks.
“This makes the investor sit back and say, ‘This is exactly why I’m not in the market. It’s a good-old-boy network,'” says Keith Springer, president of Capital Financial Advisory Services in Sacramento, Calif. “It’s not going to sit well with the public.”
Goldman Sach’s “good ole boy” was a hedge fund manager know to be bearish on mortgage debt. Goldman allowed him to help select the mortgage debt that made up a CDO that Goldman sold to investors without disclosing the conflict. The SEC and burned investors believe that Goldman and its good ole boy set them up to lose big. In any event, the favored good ole boy then made a billion dollar killing on credit defaults swaps that made money as the mortgage backed CDO lost money.
Deutsche Bank and Merrill Lynch are widely believed to have engaged in similar misconduct in other CDO transactions. The SEC is reportedly investigating.
Investors were already shaken by Wall Street’s destructive behavior. Trading volume has reportedly remained low during the rebound off the March 2009 lows. Approximately $2.9 trillion remains parked in cash, earning virtually nothing, according to the article.
“That sounds like an individual or retail investor’s reaction, and I don’t believe too many retail guys came out of money markets since last March yet,” says Jordan Kimmel, market strategist at National Securities in New York and a believer in the rally. “A lot of people are in disbelief completely about the economy and the markets.”
Part of the reason investors are leery is the increasingly complex and opaque products that precipitated the 2008 crash. Most people do not understand the workings of products collateralized debt obligations and credit default swaps, which are also the products involved in the SEC’s fraud action against Goldman Sachs.
Some believe that the “shocking” news about Goldman will boost the chances of significant financial reform, as proposed by President Obama. Others take a more cynical view. Capital’s Springer said “News like this doesn’t affect the populace. They don’t understand it.”