In Search of a Villain
In SEC v. Goldman Sachs, the government makes Wall Street the fall guy.


Andrew C. McCarthy

When the Securities and Exchange Commission threw down the gauntlet against Goldman Sachs on Friday, Henry Kissinger’s bon mot on the brutal 1980s war between Iran and Iraq sprang to mind: “Too bad they can’t both lose.”

Succinctly summing up the allegations, SEC enforcement chief Robert Khuzami quipped that the financial “product” at the heart of the suit “was new and complex, but the deception is old and simple.” Khuzami, an old pal and my partner on the Blind Sheikh terrorism prosecution, is smart, tough, and knows the securities laws through and through. To paraphrase the great football coach Bill Parcells: Goldman better bring its lunch, because it’s going to be a long day.

Still, the choice of words is telling: “deception,” not “lie.” The other side of this coin is evident in Goldman’s vigorous denial of wrongdoing. As the Wall Street Journal put it, the company insists “it made the proper disclosure” on the transaction at issue. This case comes down to what the law calls “material omissions”: Goldman claims everything it said about the securities it marketed was true; the SEC counters that Goldman failed to say everything it was obliged to say.

What is the card that Goldman is accused of withholding? It is the fact that the securities in question, a species of collateralized debt obligation (CDO), were designed by hedge-fund magnate John Paulson, who dearly hoped his creation would prove worthless. And he had good reason to believe that it would: CDOs are basically pools of mortgages sold to investors as securities, and Paulson had the smarts to foresee the housing meltdown before it was on the national radar.

In the Age of Obama, Paulson is the perfect villain: the corporate tycoon who is responsible for the whole mess — which the Obama administration would have you believe proximately caused the financial meltdown of 2007–08 — and yet rides away unscathed. Yes, he made a tidy $4 billion when the bubble burst and the mortgage market crashed, but he is not charged in the SEC’s Goldman suit. As Khuzami put it, “Goldman made the representations, Paulson did not.”

So, Democrats chime in on cue, we must have the umpty-umpth regulatory overhaul of the financial system to do what we were promised the last one (Sarbanes-Oxley) would do: perfect disclosure, eliminate risk, and ensure that anyone who makes a profit because he’s better than the rest of us at reading the tea leaves gets his comeuppance. But Paulson did not escape the noose because of a regulatory loophole: He is not charged because it is not a crime to be smart — not yet, anyway.

Paulson figured out that the government had tried to turn the dream of home ownership into a right of home ownership through a series of extortionate devices such as the Clinton-era amendments to the Carter-era Community Reinvestment Act; the Clinton-era crackdown on “redlining,” which saw the government accusing banks of racially invidious practices for failing to make loans to people who couldn’t afford to repay them; and a Bush-era delusion called the American Dream Down Payment Act, which was in fact a down payment on compassionate conservatism’s dream of creating an additional 5.5 million minority homeowners by 2010 — a dream that turns out to have come at a nightmarish cost of hundreds of billions of dollars, and counting.


Sign up for free NRO e-mails today:

NRO Polls on LockerDome

Subscribe to National Review