Goldman In Trouble??

When I visited NYC in October of this past year, we went to several prominent financial firms and when we asked anyone from any of those banks which was the best in NYC the answer was always the same, Goldman. The SEC suit brought against Goldman on the 16th took several of my future financial analyst friends by surprise because of Goldman's previously squeaky-clean reputation may be in jeopardy. The allegations against it are basically that Goldman created a Mortgage-Backed Security product (Abacus 2007-ACI or whatever) that they marketed to consumers "unfairly." The SEC claims that Goldman chose not to disclose crucial information about the security to consumers, leading them to buy it (an incur the subsequent $1 billion losses) when they otherwise wouldn't have. Basically there is this hedge fund Paulson & Co (John NOT Hank) that Goldman told investors supported this product and had already invested in it, which is a really big sign of faith since this fund is giant and highly esteemed in the financial community. Well, it turns out that Paulson & Co actually bet against the product (did the exact OPPOSITE) of what Goldman said and investors got screwed.

My question is really how much of this can the SEC really prove? The NYT has interviewed several, prominent law professors that say the SEC has chosen a particularly difficult suit against Goldman that may result in nothing being done at all. Was Goldman at fault? Probably, but who wasn't? The SEC basically has to prove that the context of the deal (the way the company marketed the product to potential investors) caused them to invest when they otherwise wouldn't. This is different from most SEC suits where they instead choose to criticize the CONTENT of the marketing strategies. How is the SEC going to prove that investors wouldn't have invested if the product was marketed differently? They probably aren't.

It seems to me that the SEC is really trying to crack-down on lax financial regulation (which it absolutely should) after a slew of ponzi schemes (damn you Madoff) and securities backed by basically no collateral arose in the wake of the most recent financial crisis. There is now increased chatter about a possible suit being brought up against AIG for its questionable practices, is this really the most productive way to deal with the financial crisis? We can all surely agree that Goldman, AIG, Lehman, and the whole lot of them messed up, but is the answer to bring suits against all of them? AND, are the small profits that they made here and there from deception even comparable to the subsequent losses incurred because of the crash in real estate prices?