A Witch Hunt Comes Up Empty

Exactly 420 years after the Salem trials, investigators at the Justice Department have concluded that witches do not exist. Not even at Goldman Sachs.

Granted, it took Justice a full year to make a determination that should have taken five minutes. And after observing that there were no witches to be found, pious prosecutors still thanked the Senate inquisitors who sought to bring Goldman and its employees to the bar for worshiping the devil of profit and casting an evil eye that launched the global financial crisis.

“Based on the law and the evidence as they exist at this time, there is not a viable basis to bring a criminal prosecution with respect to Goldman Sachs (GS) or its employees in regard to the allegations set forth in the [Senate] report,” Justice said in a statement last week. The department cited the “burden of proof,” meaning the requirement that prosecutors show evidence of guilt beyond a reasonable doubt.

Translation: There is not even enough evidence to seek a flimsy indictment without risking charges of prosecutorial misconduct.

Justice took up the case on a referral from the Senate Permanent Subcommittee on Investigations, whose chief inquisitor – er, chairman – is Sen. Carl Levin, D-Mich. The panel issued a blistering report that accused Goldman executives of misleading Congress. Goldman, the committee said, “used net short positions to benefit from the downturn of the mortgage market, and designed, marketed, and sold CDOs [collateralized debt obligations] in ways that created conflicts of interest with the firm’s clients and at times led to the firm’s profiting from the same products that caused substantial losses for its clients.”

Translation: Many Goldman clients, like most of the rest of the world, wanted to bet that the housing party fueled by easy mortgage money would go on indefinitely. In some cases, Goldman took the opposite side of that bet, and Goldman turned out to be right.

Justice has now concluded that being smarter than other people isn’t a crime.

This investigation was a witch hunt for the simple reason that even if we had taken everything the Senate committee said at face value, Goldman’s actions still would not have been an indictable crime. It is not a crime to profit from a bet for, or against, a certain class of securities. It is not a crime to have a conflict of interest with your customers. Indeed, at some level, every business has a conflict, since a business wants to be paid as much as possible, and a customer’s interest is usually to pay as little as it can.

If Goldman did things that it failed to properly disclose, there is ample remedy outside the criminal courts. Civil lawsuits over the housing bubble will be flying for many years to come. And the Securities and Exchange Commission has authority to penalize many transactions in which negative information is not properly disclosed to investigations.

Oh, by the way – the SEC closed its investigation into Goldman’s conduct in the mortgage market too, without bringing any sanctions.

These investigations were the result of political posturing that sought to find scapegoats on Wall Street, rather than Washington, for policy mistakes that inflated the housing bubble. All of this tub-thumping has resulted in virtually nothing. Goldman paid $550 million – nuisance value for the firm – to make one SEC civil case go away, apparently because Goldman got tired of being a whipping boy for not having put itself on the edge of insolvency, as many other financial firms did.

The housing mess was the product of errors galore: in Washington, on Wall Street and at millions of kitchen tables where homeowners decided to reach for the financial stars or to use their dwellings as virtual ATMs.

Errors, however, are not crimes. When you look for villains to blame for events that nobody intended, you get witch hunts.

So congratulations, I guess, to the legal minds at Justice who concluded that there is nothing they can prosecute “at this time.” They want us to know that the minute a witch shows up, they’ll be all over it.

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