Epstein on the Government's Case Against Goldman

Leave Goldman Alone
Richard A. Epstein
May 3, 2010

For the past two weeks, Goldman Sachs, the now-humbled Wall Street titan, has been battered by a potent troika of government assaults. The Securities and Exchange Commission has filed its civil fraud action. Senate hearings have had the riotous feel of a Soviet show trial. And the Manhattan office of the United States Department of Justice has recently announced its ongoing criminal investigation.

To its sorrow, Goldman has learned that its market clout is ever more vulnerable to these combined legal threats. Billions in wealth and legions of lobbyists and lawyers can't block these unilateral government initiatives. Yet they can easily fuel charges of the firm's persistent abuse of its powerful financial position. No wonder that Goldman stock has been downgraded by the Bank of America.

But now this pesky question: Just what does the public gain from three-prong federal inquisition? Those are hard to quantify, but it is easy to tote up the losses. Start with the disappearance of over $20 billion in market capitalization for Goldman shareholders. Next add the billions decline in value of other bank stocks that could easily become targets of similar investigations, simply because Goldman's now notorious transaction with Paulson & Co., Goldman, ACA and IKB followed a standard template for collateralized debt obligations (CDOs). Put any one of those other transactions under a legal microscope after the fact, and its imperfections will soon leap out. Only the grace of God for the time being spares other banks a Goldman-like hosing. Wise investors bid down share prices before the other shoe drops.

Richard A. Epstein