All Hail the SEC!

Without getting our hopes up too, too high, it is certainly good for the soul in these unfair times to see Goldman Sachs get hit with a Securities Exchange Commission indictment and watch its shares drop 10 percent in minutes.

The defenders of these scammer squids were not long in mobilizing to explain why it was perfectly reasonable for GS to engineer a $1 billion transfer of money from European banks to hedgemeister John Paulson’s pocket. But for a short time, we can bask in the probably illusory glow of Lady Justice smacking Obama’s favorite Wall Streeters across the room.

In any other field of endeavor, the case against Goldman Sachs for the Abacus rip-off would be hilariously open-and-shut: you take a big fee for letting a private investor package a lousy bond deal almost sure to tank, sell the bonds to gullible Europeans, then allow the investor to place huge bets against the bonds and cash in a few months later when they collapse.

It’s kind of like letting Tony Soprano secretly pick the players for the Superbowl and then organizing an office pool on it with Paulie and Sil getting half the boxes.

GS and its lawyers have plenty of our money and can probably flip this case like an overpriced Arizona ranch house at the height of the boom. But in the long run the issue of transparency and access to information isn’t likely to go away, not just for Goldman but for the whole financial system. All the free-market-worshiping poo-bahs still beating us over the head with the wonders of laissez-faire capitalism include a tiny caveat in their defense of the system: markets, they say, are efficient when all economic actors have access to the same information.

What the SEC lawsuit places in the crosshairs is the fact that Paulsen’s private deal with GS was hidden from the institutions plunking down their millions to buy the toxic security. The information was highly skewed, and that’s how the conniving partners made a bundle. Paulson the financier-genius who bet against sub-prime mortgage bonds suddenly looks less miraculously clever and more like a vulgar crook trading on insider skinny.

A financial system cannot forever resist body-blows to its credibility, which in the end underpins all investment and trading activity. If huge entities like Goldman cannot be trusted to tell the truth about the products they are selling, sophisticated people who handle other people’s hard-earned money eventually will not buy them. It may not happen tomorrow, but for how long can GS continue to defraud players like ABN-Amro and the European Union and not kill the goose that laid the platinum egg?