By: Scott Redler and John Darsie
Friday’s news that Goldman was being charged with fraud sent shockwaves through the financial community and stock market. From a trading perspective, we saw a return of the volatility that characterized the market collapse of 2008.
In the eyes of the American consumer, the SEC is finally holding these big banks accountable for their fraudulent activities, and it’s been a long time coming. The outrage stems from not only the fact that Goldman was committing blatant fraud, but that Washington was too incompetent and impotent to do anything about it. The new sheriff in the White House is now hell bent on overhauling the financial regulatory system, and amidst a strong push for tighter controls over Wall Street, it seems the timing of these allegations are no coincidence.
Regardless of the outcome of the civil suit vs Goldman, the allegations themsevles begin to open up a pandora’s box for the financial community. The fallout from the subprime mortgage crisis was magnified by the unethical and apparently illegal activity by large firms such as Goldman Sachs, and the SEC is under pressure to burn someone at the stake. It seems now that regulatory reform will be sweeping and decisive, greatly hindering the future earning potential of these big banks. Part of the reason firms have been able to deliver such large profit margins and executive bonuses over the last decade is because they operate behind a dark veil of secrecy. Goldman could be just the tip of the iceberg, and it will be interesting to see whether other dominoes begin to fall. The Wall Street Journal is reporting this morning that the SEC is also investigating other mortgage deals to see if other firms crossed the line into misleading investors. Surely Goldman were not the only ones duping investors, they were just the best at doing it. Two of the other egregious offenders of manipulating balance sheets, Bear Stearns and Lehman Bros, are already out of business.
The markets have largely ignored what is still a struggling American and world economy during the steep rally off March 2008 lows. Each time bad news has come out, investors have still looked to take advantage of the carry trade by buying US equities. There has been no catalyst for a real, dramatic sell-off, but Friday’s bombshell could bring that sense of fear back into the market. Sometimes, all we have to fear is fear itself, and a correction now could become a self-fulfilling prophecy. Right now, it’s impossible to know how this will all shake out. The value of being an active trader is that we do not have to play the guessing game, we will wait for the action to confirm our ideas and then take advantage of the volatility that will surely remain at hightened levels for the foreseeable future.
In terms of Goldman Sachs, it certainly could be a great time to buy the revered financial firm, or this could be the start of a dark period for the stock. At this point, we really don’t know, so you would be best served to wait for a set-up to confirm a direction. The greatest takeaway from all this is that financial regulatory reform is on its way, and it will likely hit the balance sheets of these banks hard. Just as Congress has been making a push for reform, the effort has been galvanized by news that the industry leader is being accused of fraud. Is it a coincidence? Probably not, but maybe tighter controls will prevent such a collapse of the financial system from ever happening again. For traders, its time to be at your trading desk early, ready to take advantage of the inevitable opportunities that will come your way in over the coming days and weeks.
