At this point, it is clear that the Securities & Exchange Commission (SEC) is firing a shot across the bow of the financial markets with its lawsuit against Goldman Sachs, with the UK later following suit. The SEC on Friday charged Goldman and Fabrice Tourre with allegedly making materially misleading statements and omissions in connection with a synthetic collateralized debt obligation (CDO), ABACUS 2007-AC1, that was tied to the performance of subprime residential mortgage-backed securities (RMBS). According to the SEC, Goldman failed to disclose to investors the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO. All told, the investors are said to have lost more than $1bn, the claim states. And while this talk of lawsuits against big players started pretty much at the beginning of the recession, the SEC action therefore, comes as no surprise. But as with all things economic, timing is key. And in this case, questionable. On the bright side, the Goldman news impacted the credit markets about as much as Icelandic volcano ash, once the initial hysteria wore off. “A more sober assessment of the Goldman situation coupled with a strong start to the first quarter earnings season has put the risk rally back on track,” said Suki Mann, structured credit analyst at Société Générale, who is based at the bank’s London office. So it is interesting that it wasn’t until during the most recent earnings release that this suit was filed. So while planes may not be crashing to the ground, some may still feel stranded at the airport. “The Goldman news will be with us for some time and others may well get dragged into it, but we think the shock impact is over,” Mann concludes. So what are we left with? Besides a behind-the-scenes shuffling of papers, lining-up of ducks and commissioning of general counsel at all other Wall Street firms and probably the big three credit rating agencies, it seems pretty clear that market makers believe the SEC suit holds little merit. That said, such a sentiment will be of little comfort against the coming financial cost this suit represents. So, definitively saying there will be no long-term fallout to all of this may be somewhat premature. For one, consider that ACA Management rejected a good deal of proposals from the hedge fund Paulson & Co., according to the SEC complaint. If so, then Goldman can easily make the case that the extent of Paulson’s involvement is diminished. “Less obvious is whether this lawsuit was the right one on which to bet its reputation as an effective watchdog,” said Charles Whitehead, an associate professor of law at Cornell who cut his teeth working at Salomon Brothers. Like me, he too has a hard time getting comfortable with the SEC fraud charge, and the allegation that ACA was somehow a mask for Paulson. “So long as ACA made the final call, Paulson’s view was a secondary factor to the investment and therefore disclosure to sophisticated investors would have been unnecessary in such a bullish market,” he said. “If Warren Buffet offers up shares to Goldman, who buys them as a dealer and then resells them,” he adds, “they aren’t going to tell the buyer that Buffet thinks the company is “a dog with fleas.”” Whitehead, as a lawyer, brought up the interesting point that the SEC jumped straight into charges, without perhaps trying to reach a settlement with Goldman out of court. Clearly the SEC is trying to make a mark here and shake things up. But this leaves a lingering thought, now that Republican opposition is softening to financial regulation: Is this an opportune time to be bullish with litigation? From a political perspective, the answer is yes. After all, any Goldman defense can be spun to the public as “it’s legal to screw people for money in America.” So while Goldman may not have violated the letter of the law, that may not be what’s really at stake here. And in measuring the hysteria surrounding the SEC, Goldman Sachs and other financial firms that may be caught in the regulator’s shadow, it might be best not to use bailout funds as the measuring stick, but lawyers’ fees instead. Jacob Gaffney is editor at HousingWire.com and HousingWire Magazine. Write to him.