The Current Regulatory Battle

We will not know for some time how important the Securities and Exchange Commission’s civil lawsuit against Goldman Sachs is, because it depends on the strength of the government’s case and the extent to which this is a forerunner of lawsuits against other firms.

It is important to remember that complicated securities fraud cases can be difficult to prove. But this could be a watershed event if the S.E.C. has a strong case and follows this suit with broadly similar lawsuits against other banks.

In the short run, the suit is likely to strengthen the hand of the Democrats who are pushing financial reform legislation. This case will raise the level of public anger still further, providing fuel to move the proposals through the Senate.

I already thought the odds of passage were high; this increases the odds further. However, politics is always difficult to forecast. For example, the Democrats could overplay their hand and succeed in completely uniting the Republicans, leading to a successful filibuster that kills the bill, at least for now.

If Democrats play their hand right, though, the suit will make it harder for Republicans to hold all 41 members in a Senate filibuster vote or to break away one or more Democrats. This is not a good time for a politician to be seen as defending Wall Street.

It is not clear that a different regulatory structure would have made a difference in this case. If the S.E.C.’s allegations are correct, the actions were illegal under current law. The S.E.C. could, perhaps, have done a better job of catching such actions earlier, but that is a matter of execution not broad structure.