With Goldman Sachs as the latest high-profile case stemming from the financial crisis, investors may be wondering what’s next.  Here’s a prediction for something that may happen down the line.

The panic selling of equities in the fall of 2009 was the most dramatic market collapse since the crashes of the great depression.   While much of the selling was due to a broad-based realization that the financial health of major players like Lehman Brothers and AIG was nothing more than a house of cards, it’s possible that market manipulation accelerated some of the moves.  Players who had short positions in securities that cratered won big, and the elimination of the “uptick rule” in 2007 opened the door to bear raids that had not been seen since the Depression era.  That being the case, it’s reasonable to expect that the SEC is taking a close look at what happened in late 2008 to see if there’s a case to prosecute.

Legal processes involving complex evidence can take years to put together.  What this means is that just because there has not yet been a high-profile prosecution involving the late 2008 market implosion does not mean that one will not happen.  In 2008, there were approximately 8,000 hedge funds in existence.¹  I am not at all singling out that or other parts of the financial industry, but with some many players it stands to reason that the laws of chance suggest that somebody out there came close enough to the line to get in hot water.

1. See Svea Herbst-Bayliss, Reuters, “Number of hedge funds could halve in 2009,” Oct. 14, 2008, at http://www.reuters.com/article/idUSLNE49D00R20081014 [↩]

This entry was posted on May 5, 2010 at 3:03 am and is filed under The Economy and Markets. You can follow any responses to this entry through the RSS 2.0 feed.