The End of 'Government Sachs'? Fraud Charge Builds Momentum for Financial Reform, Ritholtz Says

Timing is everything. With Washington putting renewed attention on regulation reform, the SEC's fraud charges against Goldman Sachs couldn't have come at a better time for supporters of the cause.  "There is nothing in (the complaint) that would give comfort to people who are opposing more regulation on Wall Street," says Barry Ritholtz CEO of FusionIQ and author of Bailout Nation.

The focus comes later than some would have wanted, but as Ritholtz says, "the momentum is clearly moving in the direction of more regulation."

The SEC charged Goldman with misleading its customers by withholding "vital information" about a synthetic collateralized debt obligation (CDO) named Abacus that was intentionally stuffed with the most toxic subprime mortgage-backed securities. Goldman says the charges are "completely unfounded in law and fact."  

Sen. Ted Kaufman of Delaware - one of the most outspoken supporters of reform - reacted to the charges with this statement:

"We can have only one justice system in this country for both the rich and powerful and those who are not. I'm not prejudging the merits of this action, but if we don't treat Wall Street firms that have allegedly defrauded investors of millions of dollars with the same gravity as we treat all others, why would our citizens have faith in the rule of law?"

Reform could hurt Goldman's profitability as well as what Ritholtz calls the firm's "golden boy" reputation in Washington. With former Goldman executives serving a variety of roles in recent administrations of both parties -- including Treasury Secretaries Robert Rubin and Hank Paulson -- the firm is often referred to as 'Government Sachs' by critics and admirers alike.

But the SEC's charges suggest the Obama administration is "no longer going to have a kid's glove approach to Goldman Sachs," Ritholtz predicts.