The Cop Is Back on the Wall Street Beat

05/06/2010 11:26 am EST

Focus: MARKETS

Peter Way

Founder and CIO, Peter Way Associates

Peter F. Way, editor of Block Traders’ ETF Monitor, says the SEC’s case against Goldman is welcome news for investors who have been unprotected for years.

Finally some meaningful, active, operational discipline is returning to financial markets. The Securities and Exchange Commission’s fraud charges against Goldman Sachs and related parties hopefully are the first sign of a realistic return of morality to a community desperately in need of public confidence.

Fifty-plus years ago, at the beginning of our involvement with investment markets, the cop on the beat was the New York Stock Exchange. They were the ones monitoring trading activity, setting the rules of engagement, and controlling access to the market that really counted. If you wanted to be a part of the game, you had to play by the rules and behave. Otherwise, you got thrown out, permanently.

That role continued up until the last few years, when it became undermined as major brokerage houses shed their partnership structures in favor of public-ownership corporation status. Then, when the exchange itself became a for-profit corporation with its own initial public offering (IPO), pretenses at discipline from that quarter disappeared.

During all this time the SEC was a paper pussy-cat, kept understaffed and emasculated politically, to the benefit of the investment community. Only trivial matters of form, rather than substance, were dealt with.

Finally, when the Bernie Madoff affair appeared, publicly and politically obvious, postures at the SEC became intolerable.

Nothing happens in the beltway until the involved bureaucrats are sure their backs are covered, regardless of which political party is nominally in power. For the SEC to frontally challenge the kingpin of political influence from the investment community appears to mean that the Oval Office has been kept fully apprised and endorses the action.

That suggests major difficulties for congressional “financial reform” movements that simply tut-tut the status quo. The Goldman Sachs fraud case probably is not going to be a single-purpose or single-event action.

We may hear more from the Feds at Justice, and certainly from the “plaintiff’s bar” that have now been notified that suits against one of the “deepest pockets” imaginable will provide an ongoing legal fee lottery for some time to come. (And the Wall Street Journal has reported that the US Attorney has launched a criminal investigation of Goldman. The firm has denied any wrongdoing—Editor.)

While much will be made in the media of how terrible all this is, in fact the true nature of the events are beneficial in the longer term if the public can see that regulation of securities markets is being taken seriously. Fair and honest markets are essential to the way society must operate in our style of democracy.

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