What Goldman Sachs Did and the Justice Department Didn’t

a | A

By Jonathan Weil

The Justice Department won’t be pursuing criminal charges against Goldman Sachs or its employees over its “big short” on the housing market several years ago. Fortunately, the details of Goldman's appalling behavior and role in the financial crisis will live on forever in the public record.

The department’s investigation began last year after Senators Carl Levin of Michigan and Tom Coburn of Oklahoma, a Democrat and a Republican, released the findings of a two-year inquiry by the Senate Permanent Subcommittee on Investigations into Goldman’s sales and trading practices.

At a press conference last year, Levin said he wanted prosecutors to examine whether Goldman violated the law by putting customers into disastrous mortgage bonds that it was shorting -- without telling the customers about its short positions. Levin also said prosecutors should review whether Goldman officials who testified before the panel committed perjury, including Goldman’s chief executive, Lloyd Blankfein.

In a statement yesterday, the Justice Department said prosecutors “determined that, based on the law and evidence as they exist at this time, there is not a viable basis to bring a criminal prosecution with respect to Goldman Sachs or its employees in regard to the allegations set forth in the report.” And that’s fine.

As Levin, the Senate panel’s chairman, said in an interview last year, it “is not for Congress to determine whether or not a crime was committed.” Rather, “that is for the Justice Department and that is for the SEC to make those determinations.” Separately, Goldman said yesterday the SEC had decided against pursuing further claims against the bank over its sales of subprime mortgage bonds. The SEC extracted a $550 million settlement from Goldman in 2010 over a deal called Abacus, which had a prominent role in the Levin-Coburn report.

It may have been perfectly legal for Goldman to sell doomed investment schemes of the bank’s own invention to Goldman customers, while its employees denigrated the same deals in e-mails to colleagues as “crap” and other bad words we can't use on a family website. The conduct was exposed, and Goldman’s slogan of putting customers first was debunked.

When it comes to misbehavior by powerful leaders and institutions, sometimes it is more important that the public simply be told what happened than it is for the government to mete out punishment. Anyone who wants to learn more can read the subcommittee’s 640-page report.

The Senate panel’s hearing on Goldman in April 2010 marked one of those rare moments when lawmakers conducted an important inquiry that genuinely was a bipartisan, nonpartisan effort. All of them, especially Levin and Coburn, should take a bow for a public service well done.

Here’s the statement that Levin released today:

Our investigation of the origins of the financial crisis revealed wrongdoing and failures among mortgage lenders, banking regulators, credit rating agencies and investment banks. One of those investment banks, Goldman Sachs, created complex securities that included `junk’ from its own inventory that it wanted to get rid of. It misled investors by claiming its interests in those securities were `aligned’ with theirs while at the same time it was betting heavily against those same securities, and therefore against its own clients, to its own substantial profit. Its actions did immense harm to its clients, and helped create the financial crisis that nearly plunged us into a second Great Depression.

Those are the facts the subcommittee found. Whether the decision by the Department of Justice is the product of weak laws or weak enforcement, Goldman Sachs’ actions were deceptive and immoral.

(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)

Read more breaking commentary from Bloomberg View at the Ticker.


-0- Aug/10/2012 19:30 GMT