Around the Web: SEC Takes a Bite of Squid

So is it just coincidence that the SEC brings it first major fraud case against  “a too big to fail” Wall Street bank just as the president and the Democrats gear up for battle over financial reform in the Senate?

I don’t think so. Not any more than it’s an accident that a Senate committee was holding a continuing series of tough hearings on the Washington Mutual collapse putting WAMU’s lame leadership and regulators under the harsh glare of the spotlight. Story here, documents here.

Last year, journalist Matt Taibbi immortalized Goldman in Rolling Stone as the “world’s most powerful investment bank…a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

That may have sounded like colorful hyperbole at the time. But now with what we know about how Goldman functioned in Greece, California and other places, it turns out to be a factual statement.

The SEC has charged Goldman with deceiving investors who bought collateralized debt obligations tied to the performance of residential mortgage-back securities. The press release is here; complaint here. The investment bank failed to tell the investors that a hedge fund that had played a major role in selecting the collection of mortgages that went into the CDO was also taking a short position against the CDO, according to the SEC complaint. Meaning Goldman and the hedge fund knew the mortgages stunk but peddled it to investors anyway. Nice.

“Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party,” said Robert Khuzami, the director of the SEC's Division of Enforcement.

Also charged is a 31-year old Goldman senior VP, Fabrice Tourre, the author of the following 2007 email to a friend, quoted in the SEC complaint, which should become an especially potent weapon in the fight to bolster financial reform as it moves through the Senate in the coming weeks.

“More and more leverage in the system, The whole building is about to collapse anytime now...Only potential survivor, the fabulous Fab[rice Tourre]...standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!”

Around the Web: Can WAMU be the Blue Cross of Financial Reform?

During the debate over health care reform, the public was galvanized by the disclosure of  outrageous insurance rate increases by Blue Cross.

It was that public outrage that finally got the healthcare legislation passed over Republican opposition.

Now Senate backers of  a strong overhaul of the financial system hope that televised hearings on the details of the reckless lending, incompetent management and multiple regulatory failures that sank the nation’s largest savings and loan will fuel support for financial reform in the face of relentless opposition from Wall Street.

The hearings got underway Tuesday in the Senate’s Permanent Subcommittee on Investigations, headed by Sen. Carl Levin,D-Michigan.

In strong contrast to hearings  held recently by the congressionally appointed committee to investigate the financial crisis, Levin’s opening hearing was tough, pointed and thorough. Levin said he intended for the hearings to serve as a case study for what happened at financial institutions during the meltdown. He compared WAMU’s selling and packaging of  high-risk option ARM and no-doc loans to dumping “pollutants into a river.”

Calling Washington Mutual’s former CEO Kerry Killinger “a forgotten villain of the financial crisis", Fortune’s Colin Barr sets the stage here. Business Week recounts the testimony here. CSPAN carried the hearings live they can be viewed here.

The star witnesses from WAMU were Killinger and former Chief Operating Officer Stephen Rotella. Killinger testified that WAMU was unfairly targeted by regulators because it not “too clubby to fail” as were larger financial institutions. Killinger insisted WAMU could have worked its way out of the crisis if regulators hadn’t eventually shut it down.

On Friday, we’ll hear from the regulators, who were well aware of WAMU’s questionable lending and securitization but continued to find that the savings and loan was financially sound.