Is Goldman’s Hardball Stance a Big Mistake?

Goldman pointedly avoided discussing its pending SEC lawsuit directly on its conference call earlier today, but other reports suggest it is taking an even more pugnacious stance than its initial press released indicated. From Politico:

Goldman’s crisis strategy…is already clear: An attempt to discredit the Securities and Exchange Commission by painting the case as tainted by politics because it was announced just as President Barack Obama was ramping up his push for financial regulatory reform, including a planned trip to New York on Thursday.

“The charges were brought in a manner calculated to achieve maximum impact at point of penetration,” a Goldman executive said.

Yves here. It’s important to keep in mind that this is not the only line of defense the firm is taking (for instance, predictably, it is laying the groundwork to distance itself from Fabrice Tourre, the Goldman employee singled out in the complaint). Nevertheless, the problem with this line of thinking is twofold. First, even if the Obama Administration ramped this case into the foreground at a politically expedient time, it does not disprove the idea that the underlying charges may have merit. The fact that the UK’s FSA has launched a probe into Goldman conduct, and SIGTARP is looking into Goldman’s Abacus trades with AIG. Moreover, Senator Carl Levin says “another big shoe is about to drop on Goldman” . the more closely Goldman’s conduct is scrutinized, the more troubling behavior is likely to come to light.

Second, Goldman’s actions are not playing well in the court of public opinion. That may not matter to Goldman, since its focus is on its franchise, and its clients thus far seem unruffled by the allegations. But the firm may fail to understand how unwise it is to cross swords with the authorities.

Now it is easy to dismiss the SEC case as a mere bit of political theater, and it is indeed impossible to tell at this juncture what the agency’s intentions are. While the markets took cheer Monday that the SEC leadership was split on whether to pursue the Goldman case, the tremendous public response to the case may have changed the political calculus around taking on Wall Street. Voters have long sought action, but the press and blogosphere frenzy may have succeeded in making politicians wary of being too closely aligned with big money interests.

When in doubt, the best policy to adopt when you have crossed a regulator is to show your belly. As reader MindtheGAAP noted:

Goldman, in its arrogance, is making things much more difficult for itself in the way it’s handling the issue.

Rule #1: NEVER get into a pissing match with your regulator. EVER!! The banks managed to co-opt and neuter the regulators (at least until now, perhaps), but those are very different things than just pissing them off.

Rule #2: NEVER get into a pissing match with your regulator when you know you’ve done–at a bare minimum–a lot of very bordeerline shady things for over a decade, and your entire business model is based on continuing to do those shady things for the indefinite future

Rule #3: NEVER get into a pissing match with your regulator when the public hates your guts.

Rule #4: NEVER get into a pissing match with your regulator when it gets harder for you to bribe your elected officials.

Rule #5: NEVER get into a pissing match with your regulator when your regulator can establish his career by taking you on and winning the pissing match, and may end his career if he loses.

Goldman should roll over and play nice *NOW*. They’re just digging themselves into an ever deepening grave every time they issue another press release or talk to the public (General Counsel saying that Goldman doesn’t believe that a Wells Notice is “material” and for that reason didn’t disclose this one and won’t disclose any others they may have been issued? Are they out of their minds??)

I don’t understand where Goldman got its reputation for brilliance from–their reaction to this shows a mind-boggling level of sheer stupidity.

The SEC loses if it backs down. Goldman loses if it keeps this up. The calculations here are sort of obvious…

Yves here. A supporting data point: I was briefly on an NPR program today just after the Goldman earnings announcement, and the reporter called Goldman’s unexpectedly high earnings “a public relations disaster.” That is probably true, and the exact reverse of how Goldman presumably sees it (as in good earnings would distract from the news on the litigation front, proves that Goldman’s business model is sound). If Goldman remains this out of touch, expect more examples of “God’s work” not going over so well with the heretics.


Originally published at Naked Capitalism and reproduced here with the author’s permission.  

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