The news that Goldman Sachs acted against the interests of its own customers have shaken up the financial world. The Securities and Exchange Commission suit against the company could have an irreversible impact on the industry, but the changes would be positive for everyone else except the banks.
The SEC announcement on Friday confirmed the image that most people have about Wall Street banks. It showed that these companies often resort to blatantly illegal activities to make money. What’s even worse, it showed that these companies sometimes act against their own customers so that senior executives can take home huge bonuses. This could be very bad news for the investment banking industry, because if it loses the trust of its customers, its revenues could soon dry up.
The accusations against Goldman Sachs are related to the sale of mortgage backed instruments before the subprime crisis unfolded. According to the SEC, the bank marketed these instruments despite knowing that one of the major hedge funds was betting against the same securities.
The bank not only failed to disclose this fact to its customers, it allegedly even allowed the hedge fund manager to have a say in which securities were included in that instrument. Simply put, Goldman Sachs misled its customers so that both the bank and the hedge fund could make a huge profit from the deal.
Some European banks, which lost a lot of money on these kinds of investments, have said that other Wall Street banks are also involved in similar practices. The SEC suit could be followed by a number of legal cases by investors who lost a huge amount of their funds because of the actions of Wall Street banks. Goldman Sachs stock fell by almost 13% on the news of the accusations, which showed that investors fear the company could suffer because of the damage done to its reputation by this news.
In a letter to its shareholders last month, Goldman Sachs had strongly denied that it was involved in any deals that were against the interests of its customers. It said that its actions were only intended to hedge against potential losses in the mortgage market. But most people will find it hard to believe a company that seems to have made billions of dollars at the expense of taxpayers and continues to do so despite all the controversies.