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It is possible that the SEC investigation into the bad acts of Goldman Sachs (GS) evolved over a period of time and the decision to announce formal charges just happened to take place on Friday. However, I doubt that very much.

A few thoughts:

  • This investigation has been ongoing for a long time. At some point we will know when it was initiated and when Goldie became aware of it. Reuters has a report quoting an unnamed source that the Wells Notice relating to the SEC inquiry was delivered six months ago. My own instincts on this are that it was even longer than that. This could easily have been going on for a year.
  • Mary Schapiro (head of SEC) does not go to the bathroom without first checking with Rahm Emanuel. To say that this is a high profile case is a silly understatement. This is THE case of the century. The decision to go forward with a public complaint last Friday was done with the President’s knowledge and approval.
  • Everyone in D.C. has been pointing to the financial markets as a measure of the “success” of their policies. They point to DOW 11,000, they point to narrowing credit spreads, and they look at wealth creation as the “report card” which validates their actions. I don’t believe these folks are stupid at all. They knew full well that the initial reaction of the markets would be very broadly negative. They must have considered that the SEC action could have lasting consequences to the capital markets. They knew that they had spent a king's ransom to bring the banks back to life, they must also know that this step could have the effect of undermining all of that.

Given the foregoing I have to assume that at some point the SEC sat down with Blankfein and said, “Do you want to pay a big fine, not admit any guilt and agree to be good boys in the future?” Again a guess: If on Friday the announcement had been that GS had agreed to a $3b fine and the case was closed, GS’s stock would have risen and the broad market would not be worrying about how sloppy things are going to be in the next few weeks. I think Blankfein would have written a very big check to avoid the headlines we are seeing today.

So for me a central question is, “Why last Friday?” Possibly we will never know the answer to that. But I have my own suspicions. This step was made at this time to influence the outcome of the financial regulation that is now being discussed and drafted. What better reason to implement big reforms than a big splashy case in the papers that all but proves that our big banks are crooks and they need to be regulated into oblivion.

So far this weekend I have received three mass email messages from the President. None have connected the dots directly to the SEC case with Goldman. But the hints are obvious:

Bruce --

It has now been well over a year since the near collapse of our entire financial system that cost the nation more than 8 million jobs. But the flaws in our financial system that led to this crisis remain unresolved.

Wall Street titans still recklessly speculate with borrowed money.

We cannot delay action any longer. It is time to hold the big banks accountable. Arm-twisting lobbyists are already storming Capitol Hill, seeking to undermine the strong bipartisan foundation of reform with loopholes and exemptions for the most egregious abusers of consumers.

It's a fight worth having, and it is a fight we can win -- if we stand up and speak out together. So far, all 41 Republican senators have signed a letter opposing reform -- but there is still time for individual senators to do the right thing.

Thank you,

President Barack Obama

Millions of these emails have gone out in the last 24 hours. I can imagine that a lot of people who get this message are saying to themselves this morning,

"The President is right! The SOB’s at GS are a bunch of crooks, we should shutter the bastards!”

At some point we will know what motivated the SEC to move last Friday. Should it be determined that the timing was driven to influence the outcome of pending legislation it will be a very sad day for America.

George Bush used fear to get us into a war. Obama seems to be orchestrating “fear of financials” to achieve his objectives. Bush’s war has proved to be a disaster; I doubt that the effort to rein in the financials will have a better outcome.

Source: Goldman Sachs, The SEC and the Question of Timing