Goldman Sachs case calls for stronger financial regulation

10:04, April 21, 2010      

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The U.S. Securities and Exchange Commission on Friday charged Wall Street investment giant Goldman Sachs with "defrauding investors" over subprime mortgage securities, which were largely blamed for the worst financial crisis since the Great Depression.

Although the lawsuit needs further investigation, the case against the renowned global investment company has again sounded an alarm bell for financial regulation, which may stimulate U.S. authorities to speed up reforms of financial supervision mechanisms.

The Goldman Sachs case also brings back memories of a number of financial fraud cases since the outbreak of the global financial crisis, including one related to former Nasdaq chairman Bernard Madoff, whose greed led to the largest ever Ponzi scheme that stole billions of U.S. dollars from thousands of investors worldwide.

Financial fraud not only reflects the greed of human beings, but also the faults of supervision mechanisms.

The U.S. government has pursued a liberal economic policy of "less governmental intervention" since the 1980s.

Since the beginning of the 21st century, financial derivatives have developed rapidly both in variety and size while financial supervision has lagged behind, which led to the accumulation of risks and finally the outbreak of a serious financial crisis.

The Obama administration has pledged strong regulation on financial supervision and put forward a blueprint on financial regulation reforms.

The Goldman Sachs case has two prominent characteristics. Firs, it's against a leading player in the global financial market. Second, the SEC launched the lawsuit without any advance warning. Both indicate the U.S. authorities' determination to seek stronger regulation on the financial market.

It is noteworthy that the Goldman Sachs case is by no means a one-off event. The SEC said it was launching a massive probe into the activities related to the financial crisis, which means a wider crackdown may be imposed upon more financial institutions.

The Wall Street Journal said if the lawsuit was backed by the court, the supervision of the banking sector would be promoted on a political level, which may make politicians and regulators focus their mind on some core conflicts plaguing the financial system.

Two weeks after the House of Representatives passed a sweeping financial reform bill, Goldman Sachs was singled out by regulators.

Although the White House denied the claim that the Obama administration was behind the SEC move, some analysts believe that the case may contribute to prospective approval of a reform bill by the Senate. Once such a bill was passed by the Congress, it would be the greatest reform of the U.S. financial system since Franklin Roosevelt's New Deal.

Individual financial fraud hurts individual investors while institutional fraud may disturb and even risk the collapse of the credit system. In the wake of the crisis, U.S. authorities intend to reinforce regulation, which not only aims to control risks, but also to safeguard credit system and the U.S. competitiveness.

The lawsuit involving Goldman Sachs may be quite complicated and controversial, and the disputes between market players represented by Goldman Sachs and regulators led by the SEC may escalate.

Among all the uncertainties, there is one thing for certain: the symbolic lawsuit will stir huge shock waves in the financial world and can potentially accelerate reform of U.S. fiancial regulations.

Source: Xinhua


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