Democrats look at Goldman lawsuit to spur new regulations on financial firms
WASHINGTON -- A fraud lawsuit against Goldman Sachs became a political weapon for Democrats on Monday as they fought for Republican support for a sweeping financial regulatory bill. Republicans remained unswayed in opposition.
Democrats argued that the legislation, aimed at avoiding a recurrence of the 2008 financial crisis, would help prevent financial firms from misleading investors -- the charge made Friday by the Securities and Exchange commission in a lawsuit against Goldman.
But the legislation would have only an indirect affect, at best, on such activities.
The proposed overhaul would change the way investors buy and sell derivatives -- complex products whose values are based on the values of other investments. At the heart of the Goldman charges were deals involving numerous derivatives.
The largely Democratic-written bill coming before the Senate this week would merely make the buying and selling of those derivatives more open. It would not prevent the kind of complex bundling that many believe contributed to the national mortgage bust and subsequent financial crisis and recession.
Nonetheless, Democrats were betting that the case would change the political dynamic in the Senate. Several Republicans did not dispute that the allegations against a Wall Street giant could affect the terms of the debate.
"Let there be no doubt, in my mind, our bill would have prevented that kind of events from happening, in my view, and that's what the public needs to know," said Banking Committee chairman Christopher Dodd, D-Conn. "By not enacting our legislation, by filibustering it, stopping it, we leave the American public vulnerable once again to the kind of shenanigans that have occurred in our large financial institutions across this country."
Dodd left open the possibility of removing from the bill a $50 billion fund that would be used to liquidate "too big to fail" firms. The fund, which would be financed by big banks, has become a target of Republicans who say it would merely encourage banks and their creditors to take unnecessary risks.
The Obama administration has said it does not support the fund and would not object to having it removed. Republican Sen. Susan Collins of Maine said Treasury Secretary Timothy Geithner restated that sentiment to her in a meeting Monday.
But Democrats want evidence that removing that element from the bill would result in Republican votes. Several Republicans said there were other issues they wanted addressed before agreeing to let formal debate begin.
The Securities and Exchange Commission filed civil charges Friday against Goldman Sachs, contending the bank misled investors about the risks surrounding the securities.
"The markets would have known what was going on first of all, so the market could have reacted to these things," Dodd said.
Goldman is charged with one of the oldest and most basic securities offenses: misleading clients about the investments they are buying. The product in question is complex and new, but the government's job is the same: show that Goldman withheld important information.
Whether or not the legislation would address the specific issue that the SEC has raised, it was widely noted that Wall Street was in the midst of another scandal just as the bill was about to hit the Senate.
"Anytime an event occurs out there that points to other problems, that changes the dynamic," said Sen. Bob Corker, a Tennessee Republican who has tried to seek a compromise with Dodd.
Corker and Collins both said the legislation contains many points supported by Republicans and the changes they seek would not be difficult to accomplish. Corker has said the changes could be done in "five minutes;" Collins said it could take a couple of weeks to reach agreement.
For now, both said they would vote to block the bill from reaching the Senate floor for debate -- a vote that most likely would occur next week.
Indeed, Democrats are facing unified Republican opposition and have pressed Dodd to negotiate more changes.
Dodd met with the top Republican on the banking committee, Sen. Richard Shelby, on Monday afternoon but reached no agreement. Shelby said he would need other concessions from Democrats, beyond removing the $50 billion liquidation fund, before he and other Republicans would agree not to block the bill.
Republicans and banking lobbyists questioned the timing of the SEC lawsuit against Goldman. In a letter being sent today to the SEC, Rep. Darrell Issa, R-Calif., asked the agency to explain why the case was filed as the financial regulations bill was pending.
"It must be nice for Democrats that the SEC's filing against Goldman Sachs so conveniently fits into their political agenda," said Issa, the top Republican on the House Committee on Oversight and Government Reform.
He noted that an Internet search of "Goldman Sachs" provides a link to Democratic National Committee Internet ad urging passage of new financial regulations. The DNC has used technological tools that link key search words to their ads. The financial regulation ad went up after the SEC filed its lawsuit.
White House spokesman Robert Gibbs denied any coordination with the SEC, an independent regulatory agency.
"The SEC doesn't notify the White House of its enforcement actions, and certainly didn't do so in this case," he said.
Associated Press writers Daniel Wagner and Charles Babington contributed to this report.