Dow Jones Reprints: This copy is for your personal, non-commerical use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool on any article or visit www.djreprints.com
FOR BASEBALL FANS, the unprecedented feats of the previous two decades or so will forever be attributed to the widespread use of performance-enhancing drugs such as steroids.
The mortgage bonds that aided and abetted the subprime boom have something in common with Barry Bonds. Both were artificially juiced, and the subsequent curtailment of performance-enhancing substances imply less spectacular output in the future.
That is the broader implication of the charges being brought against Goldman Sachs (ticker: GS) by the Securities and Exchange Commission. The powerful bank represents what everybody resents, from Tea Partiers on the Right to the Krugman acolytes on the Left. Even many readers of Barrons.com, which would include a broad swath of the financial community, express the desire for a mass perp walk down Wall Street to the East River.
What's suffered most so far is the reputation of Goldman, heretofore the most powerful and best-connected of all Wall Street banks. What does that mean? Most say it is an impediment Goldman is strong enough to overcome.
Yet, that also was said about other rich, powerful Street firms in the past. Drexel Burnham Lambert stood astride Wall Street in the 1980s with its junk-bond machine powering the deals of the day. But Drexel disappeared in a flash after Michael Milken, the king of the junk-bond market, was indicted (and eventually convicted) of securities-law charges.
Salomon Brothers, which dominated the bond market from the 1970s for the subsequent two decades, wound up being subsumed into what has evolved into Citigroup (C) after the 1991 scandal of submitting false bids in a Treasury securities auction. In effect, Solly was punished for buying too many T-notes. Nevertheless, Salomon has become a footnote after having been merged with the Smith Barney brokerage, which became a unit of Citi, which in turn has Uncle Sam as a major shareholder.
It's unlikely Goldman will slide down a similar slippery slope. So far, only civil charges have been brought against the firm by the SEC. And published reports say the Commission voted by a bare 3-2 majority, along party lines, to file the action. So, it's hardly and open-and-shut case.
David P. Goldman, whose new middle name should be "no relation," doesn't think Goldman Sachs will be taken down. But the former Wall Street strategist who's now an editor of First Things magazine and contributor to Asia Times, thinks the firm will wind up paying a hefty fine and possibly fire some managers to pour encourager les autres, which means, in effect, to get the other firms to toe the line by making an example of one.
It is difficult to doubt that the SEC's suit against Goldman was timed to help give a push to financial-reform legislation in Congress. Even were that not the case, the regulatory tide is turning against the unbridled policies and practices of the past.
In its place, David Goldman sees commercial banks being turned into a virtual public utility, which implies constrained lending and investment policies by these increasingly regulated institutions. And they are bracing for increased supervision by regulators.
One result, he says, given the capital requirements ahead, is that banks have been continuing to hoard cash because of prospective legislation. As a result, he says banks' loan books remain stagnant.
Instead, David continues, banks are loading up on Treasuries, which costs next to nothing to hold because of zero capital requirements.
"Foreign banks (which might also be branches of U.S. banks) are financing the federal deficit. The savings rate is just 3% which means that there can't be a huge flow into real-money investors. Entrepreneurs can't get money anywhere and there's no money available for illiquid stuff like private equity. Looks like Europe or Japan to me -- especially if we throw in the demographic profile."
Banks restrained by capital needs or regulators aren't in a position to fund an economic recovery. That's taken away the juice from the economy, which will mean fewer dingers for consumers and entrepreneurs dependent on bank credit.
Comments: randall.forsyth@barrons.com
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com
Yahoo! Buzz
MySpace
Digg
del.icio.us
NewsVine
StumbleUpon
Mixx
Two insiders, including the CEO, together sold over 200,000 shares of the retailer.
AIG and Harley Davidson rose. MGIC and Human Genome fell.
The firm kept pay restrained in the quarter and resumed a share buyback.
The beverage giant's first-quarter results were a mixed bag but we expect shares to bubble higher.
Credit Suisse likes Potash Corp. of Saskatchewan and Agrium.
A veteran transportation analyst discusses her favorite plays in a famously turbulent industry.
Jefferies & Co. raised estimates and the target price on the coal firm.
Credit Suisse, however, warns Dell may eventually take a margin hit.
Sterne Agee cited a resurgence in international drilling activity.
The firm's $90 million hit in the infamous mortgage deal could help its case against the government.
VP Pantas Sutardja sold 400,000 shares of the chip maker.
The drug maker's guidance disappointed but with a low P/E multiple and a 5.4% dividend yield the stock looks cheap.
Jefferies says Google's results bode well for the group.
Sandler O'Neill initiated coverage of the specialty finance firm at Buy.
Major indexes rise as strong results inspire traders. (At SmartMoney.com.)
Words of wisdom from Morgan Stanley's Brian Pfeifler, this year's No. 1, and four other advisors.
The SEC charges Goldman with defrauding investors. Fred Hickey plugs Microsoft.
Goldman Sachs is in the doghouse amid charges of securities fraud. But while the allegations are serious, Wall Street's reaction looks overblown.
AN INTERVIEW WITH JEFF LINDSEY: This manager of the BlackRock Capital Appreciation Fund sees opportunities in Microsoft and Paccar.
Goodyear and Whirlpool are among the many companies that boosted cash flow through accounting maneuvers. For some, it may backfire.
Bank of New York Mellon and State Street have dominant franchises with better-than-average growth prospects. Higher rates? Yes, please!
The long-awaited shift to large-caps might not be imminent, but it will come, once investors start seeking safety. Sayonara, small fry!
Financial-reform legislation would be a boon for CME Group. What the world's largest futures market is doing to keep competitors at bay.
Read Full Article »