Although it really shouldn’t have surprised anyone, the big business news at the end of last week was the the Department of Justice had opened up a criminal probe of Goldman Sachs well before the filing of the SEC’s lawsuit a couple of weeks ago.

Craig Pirrong provides his typically lucid perspective toward the news, while the Epicurean Dealmaker insightfully notes a dynamic involved in the growing cascade against Goldman Sachs that should concern us all. Interestingly, that dynamic is the same one that was involved in the prosecution to death of former Enron chairman, Ken Lay.

Frankly, after almost a decade of misdirected prosecutions of businesspeople, it’s confounding that many citizens believe that a prosecution of Goldman Sachs would serve any useful public interest.

It is indisputable that government cannot possibly discover or prosecute all business fraud. But government policies that purport to prevent fraud by prosecuting simply prompt private parties to be less careful in detecting or avoiding fraud in the first place.

Moreover, the utter randomness of the criminalization-of-business policy undermines the public’s respect for the rule of law. For example, who can possibly keep up with all the rules that government has invoked in determining whether an important businessperson gets prosecuted for a supposed business crime?

First, there was the Apple Rule, which was quickly followed by the Dell Rule.

Then there was the Buffett Rule, closely followed by the GM Rule.

And who could forget the Geithner Rule?

Frankly, the rule of law has been replaced by what Larry Ribstein has coined the criminalization-of-business lottery where winning or losing becomes random.

For instance, the owners of Long Term Capital Management may have been the earliest winners in the most recent era. On the other hand, Jamie Olis may have been the earliest big loser.

Martha Stewart lost, but at least never lost her business enterprise. Frank Quattrone also lost, but then he won, although I suspect that he believes that he lost overall.

Subsequently, Theodore Sihpol won while Bill Fuhs and his family lost a year of his life before he won, too. But he and his family will never get that year back.

And no one lost bigger than Jeff Skilling.

Meanwhile, although mainstream media darlings Steve Jobs and Warren Buffett won, several of Buffett’s associates did not fare as well. Neither did Greg Reyes.

And who knows about those Lehman Brothers executives — they may be winners, after all? I mean, everyone was doing it, right? But you never know for sure.

Finally, who possibly can justify what Bill Furst has been through?

Just as with a gambling lottery, there is no rhyme or reason as to who wins or loses in the criminalization-of-business lottery.

But in this lottery — which does little or nothing to deter the true business criminals of the world — the losers and their families give up much more than merely money.

A truly civil society would find a better way.

The inevitable SEC action against Goldman Sachs took the financial system by storm on Friday, so the weekend has been a feast of blogosphere analysis on the implications of the lawsuit. The best way to follow daily developments in the case is over at Clusterstock where Joe Weisenthal and Henry Blodget have their fingers on the blogosphereís pulse in regard to the SEC lawsuit.

The best analysis of the lawsuit that Iíve read in the blogosphere to date comes from Larry Ribstein, Erik Gerding and UHís Craig Pirrong. Read their posts and you will have a good understanding of the issues involved in the case.

Frankly, the SEC action against Goldman looks a lot more about public relations than effective regulation. As Blodget pointed out on Friday morning, the timing of the filing pushed the highly embarrassing SEC Inspectorís report on the SECís bungling of the investigation into Stanford Financial off the publicís radar screen. One would hope that the SECís due diligence in regard to its action against Goldman is better than its research into Stanford Financial, which was widely known in Houston financial and legal circles to be a sketchy outfit for over a decade before it blew up last year.

The key to the SEC’s case is that Goldman apparently did not disclose to ACA nor IKB and ABN knew that uber-mortgage short specialist John Paulson was placing bets against the underlying securities upon which the synthetic CDO was based at the same time as Paulson was helping Goldman and ACA choose the underlying securities.

Thus, the theory goes, Paulson presumably had an incentive to enhance the failure of the securities. Accordingly, the SEC contends that Goldman and Paulson structured the deal to lose, that Goldman knew the investors wouldn’t buy if they knew that, and that Goldman didn’t disclose those details because it was making fees all over the place.

My sense is that the case is far from a slam dunk (see also here and here) for the SEC, but it probably doesn’t make any difference. If Goldman defends itself and loses, then the trial penalty is that private civil lawsuits by other investors will use the judgment in favor of the SEC to establish liability against Goldman (interestingly, Goldman elected not to disclose its receipt of the Wells Notices related to the SEC lawsuit). Although Goldman could manage the payment of an SEC fine, damages in those civil lawsuits could seriously harm the firm.

Thus, my sense is that Goldman has to settle with the SEC, and probably for a good chunk of change to make the SEC look good. That will likely suit Goldman just fine because it would continue to distract the public from the far larger travesty, which was the way in which the federal government bailed Goldman out from its massive risk of loss in regard to AIG.

From a policy standpoint, the SEC action is a part of the Obama Administration’s public relations campaign to promote federal regulation of the derivatives markets, a point that Professor Ribstein makes in this post:

In other words, the SEC, under pressure to come up with something on the eve of Congress’s final push toward financial regulation comes with a case that the complaint makes clear is much more about the creation of systemic risk than about securities fraud.
This reflects, in part, the new Wall Street, more than three quarters of a century after the securities laws were enacted. Financial regulation is now much more about sophisticated market intermediaries than about individual investors who need somebody to ensure they have the truth about securities.
This is not to say that securities fraud is irrelevant. However, the SEC has struggled on that front ñ the Bank of America settlement, Madoff, Stanford.
And so now we are left with . . . Goldman.

Inasmuch as such regulation will allow federal regulators to exercise the same judgment in regard to derivatives regulation that it applied to regulating the likes of Stanford Financial and Bernie Madoff, count me as decidedly unconvinced that this development constitutes progress.

However, one positive aspect about the SECís complaint is that it provides a stark reminder to investors of the risk of doing business with the likes of Goldman. As Arnold Kling has been saying for years, perhaps it wouldnít be such a bad thing if investors didnít rely so much on the chauffered investment bankers of Wall Street and their friends in government.