There seems to be no end to the revelations about Wall Street’s manipulation of the securities market and its role in exacerbating — if not causing — what has now come to be called the “Great Recession.” As I understand the allegations now being made by the SEC, and revealed by the media, it would appear that Goldman Sachs, the most powerful investment bank on Wall Street, if not in the world, not only negligently supported the creation and ultimate downfall of the subprime mortgage market, but may actually have deliberately manipulated that market so that certain hedge funds, particularly one managed by John Paulson, were able to make enormous profits by shorting mortgage-backed securities sold by Goldman.
According to the allegations, certain executives at Goldman Sachs (we do not yet know the full extent of the firm’s involvement nor how many executives may have been involved) cooperated with Mr. Paulson to create mortgage-backed securities that were virtually certain to fail and, by failing, to permit hedge funds to make enormous profits through shorting those securities, i.e. signing contracts to sell the securities at prices significantly below those paid by the investors who bought those securities from Goldman not knowing that they would soon drop in price because their true value was far below their offering price. If these allegations prove to be true and Goldman Sachs was, in fact, involved in this scheme, then this could very possibly go down in history as one of the worst stock manipulation schemes ever conceived and executed.
The ramifications of this case go far beyond any civil or criminal penalties to which executives at Goldman Sachs may eventually be liable. The vast majority of American and foreign investors who have suffered as a result of the various scandals that have rocked our financial markets and caused so much suffering, the revelation that one of the most powerful investment firms in the world, one whose former executives now occupy some of the most powerful positions in the U.S. government, was not only negligent but actually willfully dishonest, must come as a great shock. Indeed, not only must we all be shocked, we must be outraged.
Wall Street, hardly contrite, continues to give out multi-million dollar bonuses to its employees while much of the rest of the nation and the world continues to languish in the depths of the Great Recession.
Ultimately, our financial markets depend upon trust and the belief that they are not simply a fool’s game in which the insiders make billions and the rest of us are robbed blind. Trust in Wall Street and the American financial system is already quite low. Most Americans are becoming aware that the odds at the gaming tables in Las Vegas are a whole lot better than on the New York Stock Exchange. If it now turns out that the great financial losses so many Americans and others have suffered in the past few years weren’t simply the result of naivete and stupidity, but, instead, were caused by deliberate fraud and market manipulation, then one can only wonder who in their right mind will continue to feed the greed, rapacity, and dishonesty of Wall Street in the days to come. The very existence of our financial system may well be at stake.
Every American and every foreigner who has lost money in the financial markets over the past few years must pay close attention to the charges and eventual litigation involving Goldman Sachs. If it proves true that there was direct market manipulation and that this manipulation either caused or exacerbated the current recession, then it may well be time to question whether we need a thorough reform of the American financial system.
There has to come a point when ordinary people say “enough.” There has to be a point at which Americans refuse to be cheated by a small group of financiers blinded by their greed and rapacity. There has to come a point when the American people finally come to their senses and refuse to support a corrupt system which takes away their livelihood, their security, and their futures by fraud and dishonest manipulation. The current investigation of market manipulation by hedge funds and investment bankers is of the greatest importance to all of us and to the nation.
For those of you interested in reading more on this subject, please check out my new blog, “the Grumpy Professor” on the Journal-World multimedia Web site (http://www2.ljworld.com/weblogs/grumpy-professor/). I will be posting more of my thoughts there on the current fiscal crisis, as well as what’s going on at Kansas University and in the academic world.
— Mike Hoeflich, a distinguished professor in the Kansas University School of Law, writes a regular column for the Journal-World.