WHEN TESTIFYING alone in front of a high-powered US Senate committee last month, Lloyd Blankfein, Goldman Sachs’s chief executive, said he could have done with some company from other Wall Street luminaries.
This week, his wish was partially granted, as news of a flurry of different investigations broadened the post-crisis regulatory backlash beyond the civil fraud charges from the Securities and Exchange Commission against Goldman. Goldman denies the charges.
From unconfirmed reports that Morgan Stanley and other banks are being investigated by federal prosecutors over mortgage-related securities, to the subpoenas sent to eight banks by Andrew Cuomo, New York’s attorney general, over their dealings with credit rating agencies, Wall Street is firmly in the regulators’ sights.
Talk that the SEC was looking at banks’ activities in the municipal bond market amid concerns they bet against securities they sold on behalf of cities and states, was the appropriate end to a week dominated by financial investigations.
With the political temperature rising because of horse-trading over a financial reform bill, and the authorities seeking to be seen to be “doing something” about the causes of the turmoil, there is no sign the pressure will ease any time soon.
Industry executives profess to be worried about investigations that could force banks to fight prolonged legal battles or settle with regulators at the cost of hundreds of millions of dollars.
Yet, unlike the violent reaction to news of charges against Goldman, whose market value fell by more than $12 billion after the SEC announcement, investors’ response to the latest developments has been comparatively muted.
Share prices in many banks named in the inquiries did fall this week – and the cost of insuring against their debt rose.
But losses were relatively contained considering that financial stocks were also weakened by worries over Europe’s sovereign debt crisis and US financial regulation.
Shares in Morgan Stanley, whose chief executive denied any knowledge of the federal probe, ended the week about 3 per cent lower – not a good performance but better than the double-digit percentage loss suffered by Goldman after the charges were unveiled.
As Keith Horowitz, an analyst at Citigroup, wrote in a note to clients: “Morgan Stanley and other capital markets-related stocks already price in some risk after the Goldman Sachs investigation that the SEC may be investigating all brokers regarding collateralised debt obligations .”
Securities law experts point out that, unlike Goldman, none of the other banks have been charged and that many of the probes appear to be at a preliminary stage and may not end up with anything.
In addition, the seemingly all-catching nature of the inquiries, which focus on several banks, makes it less likely that any one of them will be the focus of regulatory retribution.
“We are still at a very early stage,” said John Coffee, a Columbia University law professor.
“If anything, these investigations raise the possibility of a global settlement, which could be beneficial to share prices because it would mean that no single entity would be singled out for punitive damages.”
Others suggest a law of diminishing returns to regulatory inquiries, especially when they appear to have been encouraged by the political climate.
“The more probes you have, the more you run into scandal fatigue,” said Charles Elson, a corporate governance professor at the University of Delaware.
“The more political it appears the more difficult it is to quantify the damage to any one institution.” – (Copyright The Financial Times Limited 2010)
