Update: The charges against Goldman Sachs could be the tip of the iceberg, according to analysts. Good.
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Two of the main schools of thought on financial reform are those who seek reform through new regulations, and those who seek reform through criminal prosecution. If you will forgive me for sounding like David Brooks for a moment, in this article I will refer to them as "the New Regulators" versus "the Punishers."
The New Regulators do not believe reform is possible without changing existing law surrounding the finance industry. The Punishers do not believe reform is possible without at least some of the people responsible for the crisis going to jail. This is largely a conflict of emphasis, between those who those who view the regulations, and those who view the regulators, as the main problem.
By filing fraud charges against Goldman Sachs today, the SEC helped to bridge the gap between these two schools of thought. The Punishers are absolutely right that new laws won't mean a whole lot if there is no enforcement of those laws. However, in an environment where regulators are actually filing charges against large financial firms like Goldman Sachs for actions related to the causes of economic crisis, an improved regulatory structure begins to appear viable. However small, these charges are the first step in demonstrating that financial regulations can, and will be, enforced.
Speaking only for myself, the Obama administration would increase the credibility of financial regulation reform if they were to simultaneously appoint a special prosecutor to investigate, charge, and convict anyone who engaged in crimes that led to the financial crisis. Really, they should have done this last year. If a series of ongoing investigations, and even convictions, were taking place simultaneous to the legislative fight over financial reform in Congress, it would help provide a series a concrete examples to what this otherwise very abstract fight over financial reform can accomplish.
New regulations are needed, but new regulations without enforcement are meaningless. When regulators are actually filing charges against large financial firms like Goldman Sachs, it helps to deflate the view that regulators will not enforce any new laws. With Republicans now saying they have the votes to block the bill, this is exactly the sort of news that proponents of legislative reform need to help drive up support for their cause.
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