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Goldman Sachs Braces for Another Carl Levin Report

The Senate permanent subcommittee on Investigations, chaired by Carl Levin, is about to release another report on Goldman Sachs, specifically targeting what he colloquially called their “shitty deals,” where they took the opposite side of their own clients on complex bets.

The subtext of this is that regulators are gradually writing the rules of the Dodd-Frank law, and in particular putting into action the Merkley-Levin amendment, which would ban most types of proprietary trading and institute a version of the Volcker rule. Lawmakers seeking to influence the rulemaking process can impose pressure by releasing reports, like Levin’s, that show the dangers of prop trading in the past. Goldman was one of the worst in this regard, and the second part of this is that some lawmakers wanted to see Goldman taken to court rather than allowed to settle with the SEC:

The Abacus deal prompted the Securities and Exchange Commission to pursue civil fraud charges that Goldman settled by paying a $550m fine in July.

The regulators alleged Goldman did not disclose to clients that a hedge fund eager to short the housing market had influenced the type of loans included in the security.

Senior Democrats hope the new report, which deals with Wall Street’s behaviour during the crisis but is believed to focus heavily on Goldman, will press the SEC to reopen its investigation into the bank.

Perhaps to pre-empt this report, Goldman Sachs released some of their own findings yesterday, and while they tried to show that they lost money during the financial crisis along with their clients, that wasn’t what the whole report showed:

Wall Street giant Goldman Sachs generated at least 18 percent of its revenues last year through trading and investing for its own benefit, according to a regulatory filing made Tuesday detailing the first nine months, flatly contradicting the firm’s previous claims that such speculative activity made up a much smaller slice of its business […]

Goldman made its filing as part of a voluntary reworking of its previous accounting methods, an initiative aimed at mollifying critics who have charged the firm with profiting at the expense of its own customers. But the details of the latest federal filing merely add fuel to the charges that the company has become increasingly dependent upon trading revenues — while now enjoying taxpayer protection in its new incarnation as a bank.

In 2010, Goldman’s trading activity was particularly lucrative: Through September, investments on its own behalf were responsible for nearly 30 percent of its earnings, according to the SEC filing.

Goldman actually polled its own clients in a survey released with the filing, and they say that the survey found that “in some circumstances the firm weighs its interests and short-term incentives too heavily.”

The 30% figure for 2010 is pretty astounding, in the wake of Dodd-Frank and the Volcker rule. Without set rules from the regulators, Goldman and other investment banks are free to define proprietary trading – and it’s clear that they are defining it very loosely.

I’m eager to see the Senate report from Levin, based on thousands of internal Goldman Sachs documents. That subcommittee on Investigations did not disappoint the last time.

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David Dayen

David Dayen

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