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A Times Editorial

Getting to the bottom of the financial rot

It turns out the Securities and Exchange Commission has a pulse after all. The SEC filed fraud charges Friday against Goldman Sachs, alleging that the investment bank created mortgage-backed securities that were designed to be losers but kept that information secret from buyers. Other Wall Street firms also are reportedly under investigation for misleading investors. The Goldman case and others should be pursued aggressively, and the outcomes should shed further light on what really led to the financial crisis.

The basic narrative of one of the primary causes of the economic collapse has been fairly well established. Housing prices in Florida and elsewhere soared as home buyers easily obtained mortgages they could not possibly afford. The risky mortgages were repackaged into financial instruments, given indefensibly high marks by the rating agencies, and sold by the investment banks. When homeowners could not pay their mortgages and started to default, the investments went south. That helped trigger a chain reaction that plunged the country into a recession and resulted in record unemployment in Florida and elsewhere. While there are bright spots now and the recession appears to be over, the Sunshine State has been slow to recover.

It is bad enough that Goldman Sachs created and sold toxic mortgage-backed investments even as it made its own financial bets that the investments would fail. The SEC lawsuit goes beyond that. It alleges that Goldman Sachs created these investments with the intent that they would lose value, at the request of a hedge fund manager who wanted to bet against them. Then Goldman Sachs sold the products to buyers who expected the housing boom to continue without telling them that the hedge fund manager helped create the very products he was betting against. So Goldman Sachs made huge fees, John Paulson's hedge fund made $1 billion — and taxpayers paid billions to bail out Goldman Sachs and other investment banks.

Goldman Sachs denies any wrongdoing, but it would really be a crime if there is nothing wrong with all of this insider dealing that benefits only those in on the game. Everyone else, from the millions who have lost their jobs, to those who have lost their homes, to taxpayers who spent billions on bailouts, are paying the price. While Republicans complain that the SEC is making its move just as Democrats in Congress are pushing for tighter financial regulation, the case for tighter controls on Wall Street already has been well established. To do nothing would be to not address the failure to read the warning signs of the economic collapse and increase the likelihood that it could occur again.

The SEC's fraud suit against Goldman Sachs and its continuing investigations should help fill in some blanks. So far, it appears the economic collapse was primarily fueled by a combination of greed and lax regulation. If the SEC stays aggressive, Americans could learn whether there was something darker at play.

Getting to the bottom of the financial rot 04/19/10 [Last modified: Monday, April 19, 2010 6:33pm]
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