Saturday, May 1, 2010

The Extremely Odd DOJ Investigation of Goldman Sachs and Its Dangerous Ramifications for Goldman

The latest twist in the Goldman Sachs fraud saga is that the DOJ did not leak news of an investigation to WSJ until after it received a letter from Congresswoman Marcy Kaptur, that was also signed by 61 Congressmen, demanding that Goldman Sachs be investigated. (The full letter is in the EPJ Vault, here)

How political can you get?

Keep in mind that most securities lawyers have serious concerns as to whether the SEC has anywhere near a case to win a civil suit in court. The chances of winning a criminal case are a fraction of that. Legally, there is nothing there. That's why DOJ chose not to investigate the case in the first place. (Normally, if there was interest by the Justice Department, it would have been announced jointly with the SEC announcement)

Here's the real problem.

The DOJ will now be looking at Goldman Sachs from the inside. They do not only have their foot in the door, they will now be able to look at every nook and cranny of Goldman. As I reported yesterday:
Once the DOJ starts an investigation they can convene a grand jury and look anywhere they want..."I have seen these things up close, it's a terrible thing for Goldman," [a friend who is familiar with DOJ investigations said to me].
The securities industry is an extremely regulated industry. It is very easy to step over on to the wrong side of the regulation line, especially if you are as aggressive a firm as Goldman is.

If DOJ wants to find something they consider "criminal" at Goldman, given the regulations covering the securities industry and the fact there are 32,000 employees at Goldman, they are likely to be able to do so.

It is still unclear how serious DOJ is about this investigation. It may simply be an "investigation" to mollify Congress, that will go nowhere. On the other hand, if anyone at DOJ is taking this investigation seriously, the damage that could be done to Goldman, in a worst case scenario, could be firm ending a la Arthur Andersen given that, as Goldman Sachs CEO Lloyd Blankein put it,:

Our clients' trust is not only important to us, it's essential to us.

The question for the moment is, "How many top employees are going to sit around waiting to find how bad it gets, and how many are simply going to step in the elevator and head somewhere else with their talent?"

Goldman's failure to settle the bogus charges against them, given the current political climate, appears to be one of the worst decisions made by Lloyd Blankfein.

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