The Senate’s attempt at Goldman-like fraud

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The Senate’s attempt at Goldman-like fraud

Washington Post – Fraud, a crime in finance, is often merely an insult in politics. But there are disturbing parallels between the securities fraud charges outlined in the Securities and Exchange Commission's civil lawsuit against Goldman Sachs and Senate Minority Leader Mitch McConnell's fraudulent case against financial reform. Only, in one case the apparent victims were sophisticated investors, and in the other the designated saps are American voters.

Goldman stands accused of creating and marketing an investment tied to subprime mortgages without disclosing that the underlying securities had been selected by a billionaire investor, John Paulson, who was betting on their failure. The Wall Street powerhouse may have been alone in this particular ugliness — Bear Stearns, hardly a paragon of virtue, apparently turned down a similarly structured deal with Paulson. But it's clear that fraud was pervasive in the lead-up to the financial debacle. Last week, Senate hearings exposed the fraudulent mortgage practices that were central to Washington Mutual's business plan. The Lehman Brothers bankruptcy report revealed the use of accounting gimmicks to hide debt — a tactic that the Wall Street Journal suggests remains widespread in the industry. We saw how Goldman arranged complicated currency swaps that enabled politicians in Greece to mask the level of that country's debt while marketing its bonds, practices that were apparently widespread with U.S. municipalities as well. And ProPublica, the Pulitzer Prize-winning investigative organization, exposed how several banks helped the hedge fund Magnetar market similar securities that Magnetar was betting on to fail.

The activities among these that are illegal should be prosecuted; the scams that are not yet illegal should be banned. In particular, complex financial innovations should be outlawed or forced into open exchanges, with banks required to put their own money at risk in any complex security they market. We also need an independent and aggressive Consumer Financial Protection Agency that will police everything from payday lenders to credit card companies that have thrived by gouging their customers. We need to alter the compensation schemes that give bankers million-dollar incentives to cut corners. And we need to radically simplify the financial system, with banks that are too big to fail broken into more manageable entities.

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