Goldman's fraud

The initiation of prosecution against Wall Street icon Goldman Sachs by the US Securities and Exchange Commission (SEC) is a step towards cleansing the US financial system of the murky practices that caused the global economic meltdown two years ago. Goldman Sachs is among the world’s top investment banks and came out unscathed from the financial storm that shook the US and the world. But the SEC claims that it resorted to deceitful and fraudulent practices, and made money at the expense of its customers. It has charged that Goldman structured and sold sub-prime securities, which were at the heart of the US financial crisis, knowing very well that they would fail. It allegedly colluded with a hedge fund manager who also profited from unethical practices. The bank is said to have made profits and thrived on the risky instruments it sold, all the while knowing that these were bad investments for its customers. The crux of the charges is concealment of vital information. Apart from individual customers, other banks and pension funds that bought Goldman’s products suffered major losses.

Goldman has stoutly denied the charges and claimed that it has done nothing illegal. The problem in the arcane world of the US financial system is that many banking and investments practices are in the grey area between morality and legality. Successful prosecution of financial institutions for fraud and malpractices has been rare. Some of the institutions failed in the aftermath of the bubble because they could not cope with the financial consequences of their actions, not because they were made to pay a legal price for them. It may not be easy to prove the case against Goldman Sachs in courts because of the infirmities of the existing regulatory system. The legal system has not been able to catch up with the complexities of the products and practices evolved ingeniously through many years.
Whatever be the fate of the prosecution, the SEC action has sent out the message that it is ready to deal with the questionable practices of the big boys of high finance. It has also put into sharper focus the need for better and tighter financial regulations. President Obama has declared that he would go ahead with a regulatory reform plan. Such reforms will again not be easy in the US where politics and business are strongly interlinked and where there is a strong ideological opposition to regulation.

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