Goldman Sachs PR Nightmare: The Reckoning

In July, I had a post titled Goldman Sachs PR Nightmare. In it I wrote:

The financial industry is at risk for regulation and public hatred unseen since the Great Depression. While Goldman’s connections with government may ensure its survival, it also ensures that many unpopular events will have Goldman’s name attached to it. The risk here is that public sentiment finds a target for its ire, rather than a generalized hatred of everything Wall Street.

The fraud charges against Goldman have legs due to the negative social mood and the bad publicity the firm has received over the past two years, but this also means it will spread far beyond Goldman.

Amir Efrati of the Wall Street Journal lays out the argument in Why the Goldman Story Has Legs:

First off, Goldman has been feeling heat in recent months amid record profits and revelations of their wild success amid the credit crisis, which hit other Wall Street firms hard. To say the firm had a target on its back, politically speaking, is an understatement. An hour after the suit was filed, Goldman shares were down 13%.

Second, the SEC also has been under seige in recent months for, among other things, perceived failures to catch Ponzi schemer Bernard Madoff and some high-profile litigation trip-ups, including its failed insider-trading case against Mark Cuban. If the Goldman case is successful, it could help rebuild the agency's reputation.

Third, the case filed by the SEC prominently features hedge fund Paulson & Co., led by John Paulson, who made the "Greatest Trade Ever” by betting against the mortgage market. His firm earned $15 billion in 2007 alone.

The SEC's case focuses on a single transaction structured by Goldman, for which it allegedly earned $15 million in fees from Paulson.

Generally, I would view this news as bullish. Government is so slow that by the time it acts, the public and the markets are about to or are already moving in the opposite direction. However, I expect that at the very least, this is the tip of the iceberg. When the charges really start to fly, then it may be near at least an intermediate bottom.