When last week’s earthquake rattled Wall Street trading floors, it didn’t take long for the irreverent inhabitants to start joking that the quake – not to mention Hurricane Irene – was all part of a vast plot orchestrated by Goldman Sachs and its CEO, Lloyd Blankfein.
“They plotted it all just to stop us talking about it!” said
one trader, before collapsing in laughter.
The latter “it”, of course, is the news that Blankfein has retained the services of power lawyer Reid Weingarten. When that was revealed last Monday, it trimmed more than $2.5 billion off Goldman’s market cap in a single day, making the employment of Weingarten one of the costliest hirings in history. (To be sure, the market regained some common sense; the stock price is now xxxxx.)
Weingarten is a big shot among defense lawyers, but not infallible. He represented WorldCom CEO Bernie Ebbers, convicted of securities fraud and serving a 25-year prison sentence, and film director Roman Polanski, still wanted for sentencing in the U.S. for sexual assault of a 13-year-old back in 1977. And on Aug. 22, Weingarten client Anthony Cuti, former CEO of Duane Reade, was sentenced to three years in prison for securities fraud. But it’s safe to say that Weingarten is accustomed to working with clients with big image problems – something that may well help if Blankfein does find himself facing legal woes.
For now, at least, that’s anybody’s guess. The stock market’s panicky reaction notwithstanding, the news that Blankfein has hired his own lawyer (although Goldman will be footing the bill) is hardly surprising. After all, he and other top Goldman execs have been well aware since early 2011 that they are the focus of investigations by both the Justice Department and the SEC, on the insistence of some members of Congress. Four months ago, the Senate permanent subcommittee on investigations asked both agencies to review its findings that Goldman – as well as other financial institutions – sought to enrich itself at the expense of its clients and, in doing so, helped undermine the financial system. Senator Carl Levin (D-Mich.) wondered aloud about charging Blankfein with perjury in connection with his testimony during last year’s marathon hearings. (Company spokesmen have insisted any such charges would be utterly unfounded.)
Much as the prospect of Goldman and Blankfein having to defend themselves in an open courtroom delights Goldman-haters, such an outcome is still far from a sure thing. True, the Obama Administration would win kudos (and probably also votes) if it’s seen to be cracking down on Goldman – aka the demon bankers of Wall Street. But there’s a complex political calculus taking place behind the scenes. Would a burst of populist enthusiasm over finally going after alleged financial crisis culprits endure long enough to make a real difference in Election 2012?
Lawsuits against Wall Street figures are notoriously tricky. Prosecutors couldn’t win convictions against two hedge fund managers from now-defunct Bear, Stearns, for instance.
Also, to be really cynical about the political calculus, consider the surging GOP candidacy of Rick Perry, whose comments about Ben Bernanke and the Fed made Wall Street shudder. If the Republicans look as though they will nominate someone who unnerves the financial community, Obama may be the safe choice. But a Goldman prosecution might give donors pause, too.
Any jury is likely to have precious little sympathy for Goldman. But proving a case against its savvy traders is likely to be a complex matter. What happens if the government brings an action alleging that Goldman failed to disclose material facts to its investment clients—and then is forced to settle? After all, that is exactly what happened last summer, when the SEC managed to extract a weak admission from Goldman that its disclosure about the now-infamous Abacus investment could have been better. (Investors in Abacus weren’t aware that it had been structured at the behest of hedge fund manager John Paulson, who had played a role in selecting mortgage securities he wanted to short, leaving the other side of the deal to what some on Wall Street refer to as the “dumb money”.) Sure, Goldman forked over a massive fine $550 million fine, the largest ever paid by a Wall Street firm. But it emerged from the months-long ordeal relatively unscathed: if its earnings are weaker today than last summer, that has more to do with market forces than the efforts of law enforcement to crack down on the firm for treating itself as its own best client.
If the Obama Administration wants to bring another case based on similar grounds, it’s going to be tough. After all, Goldman Sachs has a fiduciary duty to its investors to make money, to be prudent, to try to maximize profits and minimize losses. Weingarten and any other hotshot securities lawyer worth his or her salt just has to stand up in court and point that out – or allow the case to be bogged down in technicalities that leave a jury baffled, confused and unable to reach a consensus.
A trial for perjury – entirely hypothetical at this point, as no charges of any kind have been filed – might be another matter altogether. Lying is something pretty much anyone can understand. Remember the phrase, “I did not have sex with that woman”? Of course you do. Does Blankfein want to revisit every phrase he uttered during his (carefully coached) testimony before Congress? Almost certainly not. Many of those phrases can be interpreted myriad ways, including the one that most enraged Sen. Levin – Blankfein’s statement that Goldman didn’t bet against the mortgage market only in quest of profits for itself. On the other hand, does the Justice Department really want to put semantics at the heart of a trial that should be about bigger issues?
Bringing a case against the biggest fish of all – Goldman and Blankfein – is a complicated proposition, which is why, nearly three years after the financial system teetered on the brink of collapse, it hasn’t happened. The problem is that as the years have passed, the prospect of losing or being forced to settle such a case has become more politically risky, rather than less so. Already, President Barack Obama is under fire for his handling of the economy and for what some see as the failure to punish Wall Streeters. At this stage, any half-hearted, imperfectly timed, or less than-completely-successful efforts could only weaken the administration’s position going into Election 2012. So Lloyd Blankfein may be lucky enough never to need Reid Weingarten sitting beside him in court.