No poster boys for crisis is bad news for Goldman

The worst thing that’s happened to Goldman Sachs Group since the financial crisis started was the acquittal of former Bear Stearns hedge-fund managers Ralph Cioffi and Matthew Tannin on November 11.

They were found not guilty of misleading investors who lost $1.6 billion, a verdict that deprived the public of poster boys for economic woes while increasing pressure on the government to do something, anything.

Unable to find a fall guy for the financial crisis and recession, the American people and Congress will take out their frustrations on institutions, starting with Goldman. The firm would have collapsed in September 2008 without a government rescue that reached $50 billion. Still, it paid employees $10.9 billion last year and has already set aside $16.7 for the three quarters completed this year.

Cioffi and Tannin, arrested in June 2008, weren’t the first individuals the US government tried to blame for the onset of the subprime crisis. In March 2008, Congress summoned Countrywide Financial chief executive officer Angelo Mozilo and former chief executives Charles Prince of Citigroup and Stan O’Neal of Merrill Lynch to Capitol Hill to explain their pay packages. Perhaps lawmakers were hoping to find a smoking gun.

The witnesses were unfazed, because they had done nothing illegal then or after. Bear Stearns collapsed the following week. Cioffi and Tannin were arrested three months later.

Yes, there may yet be some convictions in individual mortgage-fraud cases — maybe. Yes, the government may be investigating Joseph Cassano, the former head of the derivatives unit of American International Group, which received a $185-billion government rescue.

But if the government couldn’t convict Cioffi and Tannin with something as clear as e-mails, one wonders how it will succeed in prosecuting something as opaque as derivatives at AIG — if a crime was even committed.
There are no “perps” responsible for the financial market collapse and recession, for at least two reasons.

First, there is plenty of blame to go around. Americans took out mortgages they couldn’t afford. Congress encouraged home ownership and deregulated the financial-services industry, and regulators failed to detect systemic risk. Everyone participated; it wasn’t illegal to get mortgages, or package and sell them, or insure them with credit-default swaps.

Second, people resent the rich more than they want vengeance on villains — and no one is richer in the public eye than Goldman Sachs, still benefiting in subtle ways from government support. So Congress and the public will set their sights on institutions, dismantling them if necessary — even if they’ve done nothing wrong. Something similar has happened before.

In June 2002, Arthur Andersen, the auditor of Enron, was convicted of obstruction of justice. The verdict effectively put the company out of business, no matter that it was unanimously overturned three years later by the US Supreme Court.

The trial of Cioffi and Tannin is over. There may be no others and if there are, they probably won’t succeed. To borrow from someone who saw it coming, Congress and the public will not be satisfied until they get their pound of flesh.

It’s starting to happen again. A week after the Bear Stearns acquittals, the House Financial Services Committee, considering legislation to overhaul Wall Street rules, voted 38 to 29 to approve an amendment that would let regulators dismantle a firm, limit mergers and acquisitions and force an end to activities deemed systemically risky.

Fast forward to June 2010, when the US mid-term congressional elections are revving up. One can imagine politicians distinguishing themselves by how far they are from Goldman Sachs, cognisant as they are of the way Democrats in 2002 and 2004 ran ads highlighting the friendship between President George W Bush and Enron’s longtime CEO Kenneth Lay.

History may not repeat itself, but it often rhymes.

Goldman’s “competence” will come to be seen as a consequence of privileged access to market information and a willingness to use it without sharing this knowledge with their customer base. It may all be legal, but in public hearings it will be seen as bad form.