Lessons from the Goldman Sachs Lawsuit

Goldman Sachs, America’s biggest investment bank, is facing fraud charges. Goldman Sachs is suspected of allowing its investors to suffer colossal losses in failing to disclose improper insider trading information while selling CDOs (collateralized debt obligation), derivatives. The company is accused of conducting secret deals, unlike the products sold to investors. Apparently, other large investment banks are not free from these charges either. The U.S. Securities and Exchange Commission (SEC) plans on expanding its investigations to other investment banks, while countries like England and Germany denounced the “moral bankruptcy” as they start investigations into the situation as well. Some are concerned that if Wall Street suffers a trust crisis, another financial crisis could come out of the U.S.

News of Goldman Sachs casts a dark shadow on the convalescent world financial market. In the domestic financial market, stocks’ value plummeted yesterday. The Korean Center for International Finance warned, “on the whole, we should be concerned that this situation could blow up into a bigger event.” Financial regulators are busying themselves with the task of finding out if the Goldman Sachs situation is connected to our financial market.

From here on, there will be support for financial regulation to prevent a relapse of financial crisis. The U.S. is jump-starting financial regulation legal reform to control the risky investments of investment companies and strengthen the monitoring and supervision of derivative-based transactions. Finance minister Yoon Jeung-Hyun has said Korea would participate in international discussions regarding the introduction of a bank tax.

The financial industry must consider the Goldman Sachs situation an instruction with only bad lessons. The reality is that domestically, controversy surrounding the selling of derivatives is not ending—take the case of return hedge product KIKO (knock-in, knock-out) spiraling into a courtroom battle. The most pressing agenda is dispelling the moral hazard of investment companies by increasing transparency. To this end, financial regulators must quickly implement regulation devices for investor protection. It is time to remember the basic principle that all financial transactions must be done fairly.