Goldman Sachs Scandal, Wall Street Plunge Underscore Need for Sweeping Banking Reform

Two events that played out during the last week of April and the first week of May should once and for all put an end to any debate about the absolute need for dramatic and sweeping banking reform.

The first was the tone-deaf testimony offered by top Goldman Sachs officials during hearings before the Senate Permanent Subcommittee on Investigations on April 27.  The second event came just a few days later (May 6) when Wall Street went on a wild roller coaster ride that saw the stock market lose 1,000 points.

Clearly, the massive sell-off experienced by stock exchanges reflected investors’ worries about Greece’s financial problems and fears that those problems could spread to the rest of Europe and impact the world. However, it seems that mishandled computer-controlled trades exacerbated the problem and now has officials at the New York Stock Exchange, the Nasdaq and others trying to figure out exactly what happened. The Securities and Exchange Commission has also initiated its own investigation into the matter.

Main Street, still angry about massive government bail-outs and obscene Wall Street bonuses, is keeping the pressure on Senators as they continue to debate the 1,400-plus-page legislation that would put new restraints and oversight on Wall Street with the aim of avoiding another financial meltdown.

Certainly, Sen. Carl Levin (D-Michigan) pulled no punches during his angry questioning of Goldman Sachs top executives called to testify before the Senate committee in the wake of the SEC charging the firm with fraud alleging that it duped clients by selling them a complex financial instrument that was designed to fail.

Levin pressed Goldman Sachs CEO Blankfein to explain why he said he was “not troubled” by pushing clients to invest in risky securities and failing to disclose that the firm was betting against those very same securities.

Blankfein’s answer: “I don’t believe there’s a disclosure obligation.” Basically, he said he saw nothing wrong with telling clients to do one thing while Goldman Sachs did the exact opposite.

According to the Washington Post, Levin and other senators focused much of their questioning during the hearing on emails that show executives and other employees at Goldman Sachs knew that the firm was making money on the collapse of the housing market, largely by betting on the failure of mortgage securities and derivatives. These were the same ones it bundled and sold to investors, whose failure led to the financial crisis.

Sen. Levin said the emails point to the need for more regulation of the financial system, including more transparency about derivatives. “These emails show that, in fact, Goldman made a lot of money by betting against the mortgage market.”

Republican Sen. Richard Shelby (Alabama) called for an end to the “casino atmosphere” on Wall Street.  “They're gambling basically on synthetic ideas and so forth with somebody else's money, putting banks and the whole banking system at risk and producing nothing.”

It seems Senators are finally heeding the public’s “get tough on Wall Street” message.

Two Republicans recently joined Democrats in voting to defeat a GOP-backed measure that sought to weaken a consumer protection agency that would be created by the bill.

President Barack Obama, still seeking bipartisan consensus on financial reform, said he wants to “continue to work with Democrats and Republicans because protecting the American people should not be a partisan issue.”

Urged on by the President, Democrats have said the goal is have a bill on his desk by early summer.