THE GOLDMAN SACHS CASEPart I: "Clowns to the Left of Me" James S. Henry

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Well, we no longer have to worry only about corrupt bankers in Kyrgystan. Ever since the Goldman Sachs case erupted last week,  there's been plenty of fresh banker blood in the water right here at home, with scores of financial pundits, professors-cum-prosecutors, and political piranha swirling around the wounded giants in the banking industry as if they were a herd of cattle crossing a tributary on the upper Rio Negro.

This feeding frenzy was precipitated by last Friday's surprising SEC announcement of civil fraud charges against Goldman Sachs -- heretofore by far the most profitable, highly-respected, and, indeed, public-spirited US investment bank.     

Despite -- or more likely because of --  Goldman Sach's  relatively clean track record and  illustrious credentials, many commentators  have assumed a certain Madame Defarge pose, reigning  down  censure and derision from the penultimate rungs of their  mobile moral pedestals. 

Over the weekend, for example,  Huffington  featured a  half dozen vituperative columns on the subject, including  a Vanity Fair contributing editor's feverish claim that the whole affair was somehow deeply connected to one high-level Wall Street marriage, and an MSNBC host's denunciation of Goldman for refusing to appear on his show -- his show ! There was also a plea from Madame Ariana for criminal charges.

In fact, this is a case where, as we'll see in Part III, the SEC's civil charges against Goldman Sachs are not only highly debatable, but largely beside the point.  

Meanwhile, Bob Kuttner,  another Huffy perennial, and one of our most prolific popularizers of conventional liberal dogma, asserted  that Goldman demonstrates conclusively that Wall Street en tout  is nothing but an on-going criminal enterprise, up to its eyeballs in outright fraud. 

In a lurch toward financial Ludditism, Bob figuratively placed his hands on his hips, stomped his feet,  and demanded nothing less than a "radical simplification of the financial system" -- leaving it to the reader's imagination to determine just what the hell that means. 

Will we still be permitted to use ATMs, checking accounts and paper currency, or  will we all soon have to return to  wampum beads and n-party barter?   

Elsewhere, the Daily Beast published a de facto job application  from Harvard Law's Prof. Alan Dershowitz -- otherwise well known in the legal profession as "He whose key clients are either fabulously wealthy or innocent."  

Prof. Dershowitz argues -- quite rightly -- that Goldman'  behavior, while no doubt morally reprehensible, was also by no means clearly illegal. On the other hand, he also says the law is so vague that hedge fund investor Paulson might even be charged with conspiracy to commit fraud.

Well, ok -- except for the article's faint suggestion that for a modest  fee, our country's  finest criminal lawyer may just be available to help explain all  this to a judge --  and also to argue that  "only a tiny fraction of investment bankers who abuse their clients actually commit murder."  

THE RECKONING

Finally, there is the omni-present, virtually unavoidable  Simon Johnson, a Peterson Institute Fellow, MIT B-school prof, book author, "public intellectual,"  and  "contributing business editor" at Huffington.

This week has been  Prof. Johnson's heure de gloire, and he is living it to the fullest.

All week long he could be found at all hours on nearly every cable  news channel and web site, pitching his own increasingly Puritanical, if not neo-Manichean views of the banking crisis and Goldman's role in it.

At first,  Prof. Johnson merely expressed delight that the US had finally reached its "Pecora moment" --   referring to the 1933-34 US Senate investigation of Wall Street that, indeed, makes the modest $8 million  Angelides Commission look like a California '68 love-in.

But by mid-week he'd had moved on to a much harsher assessment.

Not only is Goldman guilty as sin, but  hedge fund investor John Paulson, one of the key parties to the Goldman transaction, deserves to be "banned for life" from the securities industry.  If necessary, Johnson says, the US Congress should even  pass an ex post facto bill of attainder!

Now of course Prof. Johnson hails from the UK.

He may therefore not be aware that the US Constitution (Article 1, Section 9) has explicitly prohibited both ex post facto laws and bills of attainder (legislative decrees that punish  a single individual or group without trial) ever since 1788.

Just this month, a US federal  district court in New York struck down Congressional sanctions that singled out ACORN, the community organizing group on precisely these grounds. The case is now on appeal.

Indeed, even in the UK, there have been no bills of attainder since 1798. 

MATERIAL OMISSIONS

Despite Prof. Johnson's limited grasp of US or even UK law, and his Draconian appetites, I've  actually grown rather fond  of him lately -- or at least more understanding.

This is partly because since he left the IMF in September 2008, he's apparently had a kind of  road-to-Damacus epiphany.

He now realizes, as if for the first time, the enormous carnage that has been inflicted by a comparative handful of giant global banks, as well as  the huge potential rewards  of  decrying these outrages from the roof tops.

One of only nine "former IMF Chief Economists" who still walk amongst us,  Prof. Johnson may have only served in that post briefly,  from March 2007 until September 2008. 

But that 1+ year was more than enough  time for him to leave a lasting impression at the IMF. 

He is still fondly remembered at the IMF not only for  having entirely missed the 2007-08 mortgage crisis even as it was unfolding, but also  for deciding in July 2008,     less than 3 months before the entire global financial system nearly collapsed, to sharply increase the IMF's growth forecast for both 2008 and 2009. 

That was  just one month before the otherwise-feckless Bush SEC initiated the 18-month investigation of Goldman Sachs that  ultimately led  to last week's charges. 

If and when the Goldman Sachs case ever comes to trial, therefore, it may be interesting for Goldman's attorneys --   perhaps Prof. Dershowitz -- to consider calling Prof. Johnson as a witness for the defense.

After all, he probably qualifies  as an expert on the heart-rending experience of just how difficult it was even for highly-trained experts to have clear peripheral vision, much less perfect foresight, back in the heady days of the real estate boom.

He may also be able to instruct the jury on the fine arts of concealing what one really believes  in order to reconcile the divergent interests of multiple clients. 

In Prof. Johnson's case, these included IMF senior management,  executive directors, and a myriad of country officials who were all pressuring the IMF to inflate its forecasts back in 2008,  just as housing markets and financial markets were beginning to crumble.

In July 2008, on Prof. Johnson's watch,  they temporarily prevailed.

From this angle, the IMF Chief Economist's role might even be compared to that of a certain young Goldman Sachs VP. 

CONSOLATIONS

Even in the dark days ahead, therefore,  Goldman Sachs execs have at least a few consolations.

First, they can remind themselves that there were very damn few heroes in this sordid tale -- journalists, politicians,  public intellectuals, and economists included. 

Indeed,  Brooklyn-born investor John Paulson may turn out to have been, if not quite a "hero," at least  one of the few relatively  straightforward and consistent players in the lot.  

At least in his own investing, he consistently opposed the systematic distortions about the housing miracle and  the exaggerate  forecasts --  dare one say frauds? -- that institutions the US Treasury, the Federal Reserve, and Prof. Johnson's own IMF employed in the final stage of the real estate bubble, in a failed attempt to achieve a 'soft landing.'  

Second, while it may be hard for us to imagine,  things might actually have turned out a whole lot worse. 

Goldman Sachs might well have relied on Prof. Johnson's sophisticated, bullish forecasts rather than on  John Paulson's intuitive short-side skepticism. 

How much money would Goldman's clients, investors, and the rest of us have lost then?

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© JSH, SubmergingMarkets, 2010.