The Securities and ExchangeCommission’s (SEC) civil lawsuitagainst Goldman-Sachs suggests they are serious about addressingsecurities fraud. These charges send a powerful message to those whomanipulate markets.
Market manipulation describes a deliberateattempt to interfere with the free and fair operation of the market andcreate artificial, false or misleading appearances. Market manipulationis prohibited in the United States under Section 9. The Actdefines market manipulation as transactions which create an artificialprice or maintain an artificial price for a tradable security.
Although the SEC may not have the legal teeth to exact punishments through thecourts, they have exacted their pound of flesh from Wall Street just bypressing charges against Goldman-Sachs. After the initial disclosure ofthe lawsuit, shares of Goldman Sachs plunged 13%, even though theyreported earnings of $3.46 billion in the first quarter of 2010.
The repercussions of the SEC charges reverberated throughout the marketsand the major indices tumbled. Broader stock indicators also took a hit, the Dow Jones Industrial shed hundreds of points, and on the NYSE, five stocks fell for every one that rose. Positive new consumer sentiment,better housing starts and strong quarterly results from companies suchas Google, Bank of America, and General Electric could not keep themarkets from going south.
Goldman Sachs was amongst those hardest hit by the SEC’s charges, but many in the financial sector immediatelybegan to bleed as the news about the criminal investigation broke.
While the general population vilifies derivative traders, they ignore thereal culprits. Rather than focus on derivative trading, we need to erect safeguards against those who would artificially inflate (or pop) abubble purely for speculative gain.
Although it may be popular to suggest that it is "morally reprehensible" for a firm like GoldmanSachs or Morgan Stanley to "bet on both sides," it is also an uninformed view. Derivatives may have been the focus of public ire, but they are a form of hedging that is sewn into the fabric of the financial system.Derivatives are actually an important means of mitigating against risk.
Although derivatives are not the evil financial instrument they are made out tobe, as the recession of 2008 illustrates, overselling them can get usinto serious trouble. Free markets may be a marvellous thing, butregulations are absolutely necessary to help us avert financialcatastrophes. Although we clearly need greater regulation, most cannotunderstand the financial system well enough to know which regulatoryapproach works best.
With the aim of shedding light on financialregulation, well known investor George Soros offered his assessment ofthe recession of 2008. In an essay written on Oct. 25, 2009, Sorosindicated that there is an urgent need for financial reform. In the essay, he explains:
"Instead of a tendency towards equilibrium, financial markets have a tendency to develop bubbles. Bubbles are not irrational: it pays to join the crowd, at least for a while. So regulators cannot count on the market tocorrect its excesses." This is why, according to Soros, "financialauthorities must accept responsibility for preventing bubbles fromgrowing too big."
While government stimulus staved off economicdisaster, too much stimulus can inflate bubbles. With all of thegovernment money being poured into the green market, we need to bevigilant. However, even more dangerous is the kind of regulation that is a drag on the economy and inhibits the growth of green without reducing the incidence of bubbles.
Transparency can go a long way, but if we are to achieve meaningful financial reforms that limit thecataclysmic effects of systemic shocks, we must work to prevent thewilful manipulation of the markets for financial gain.
Despitesome last minute amendments, the Financial Regulation Bill was approved by the Senate. Even without this newlegislation, we have already seen that government agencies are capableof delivering punishing blows. Wall Street should take heed, even if the SEC cannot win in a court of law, they can have a major impact on stock valuations.
While Goldman Sachs may not be found guilty, theirreputational capital has been compromised and this is something that noinvestment bank can afford. The wider implications may encourage somewould be market manipulators to reconsider. The SEC’s charges and theFinancial Regulation Bill may also encourage Wall Street to cooperatewith efforts to make the entire system safer.
Economic growth isessential to the war against climate change. Without economic growth,there will be insufficient investment in new energy sources andsustainability efforts. As Paul Hawken said, "Business is the onlymechanism on the planet today powerful enough to produce the changesnecessary to reverse global environmental and social degradation." Weurgently need to find the delicate balance between unfettered economicgrowth and appropriate regulation.