Tickers in this Article: GS, BAC, C, JPM, MS
The big buzz in the financial world now has Goldman Sachs (NYSE:GS) front and center. Just when we thought the pain of the financial crisis was finally behind us, news that the SEC has charged Goldman Sachs with a civil suit over potential improprieties on a mortgage backed securities deal sent the financial markets into a frenzy. While the past two years has taught investors not to take any financial mishap lightly, a closer look at this particular issue shows it's very likely that Mr. Market is overreacting.

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See the Big Picture
The SEC's civil suit centers around $1 billion worth of mortgage backed securities that it alleges Goldman shopped around to certain investors while it knew that another sophisticated hedge fund, Paulson and Co., was betting against the same mortgage pool. While any allegations that the SEC brings forth should not be taken lightly - and addressed with full cooperation - it's important to understand some key points.

No Unsuspecting Grandmothers
First, Goldman was dealing with sophisticated investors. Three to be exact. By most definitions, the SEC deems such sophisticated investors to be qualified enough to understand the inherent risks in trades that common investors would not. It would be one thing if Goldman was shopping this around to thousands of individual Americans or pushing it on pensioners through boiler room tactics, but these were sophisticated investors. Second, although we are talking about $1 billion, it didn't happen yesterday. Sure the markets biggest concern is that the SEC will uncover similar activity by other major financial institutions such as Citigroup (NYSE:C), JP Morgan (NYSE:JPM) and Morgan Stanley (NYSE:MS). Yet Goldman's issue is concerning an MBS dating back to 2007 which the SEC knew about for some time. It's likely others would have been uncovered by now. (For related reading, see Who's Looking Out For Investors?)

Don't Mess With a Fragile Economy
Over the past couple of years, Uncle Sam has spent nearly a trillion dollars aiding a troubled a financial industry and stimulating the economy. A billion dollar mortgage backed securities issue concerning a couple of sophisticated investors is far too innocuous that the government will risk letting it shatter whatever fragile confidence regarding the US economy remains. Indeed, the 31 year-old Goldman trader, Fabrice Tourre, who was at the center of this issue, will most certainly be fined and likely dismissed from the firm. Goldman, in a similar situation to Bank of America (NYSE:BAC) regarding Merrill Lynch, will likely pay a settlement along with conditions aimed at preventing this from happening again.

Not to Be Taken Lightly
Any improprieties or charges by the SEC or any other regulatory agency should be taken seriously. At the same time, investors ought to step back and see this for what it is - a deal amongst multi-billion dollar sophisticated investors who understood the risks and rewards of the trade. As long as that is all this is, this issue should ultimately be resolved via an appropriate settlement. Any excess sell off in financial shares, and investors may want to take a closer look. As of now, there is little need for excitement. (For related reading, check out Policing The Securities Market: An Overview Of The SEC.)

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