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By Charles Payne, CEO & Principal Analyst

Congress gets to grill Wall Street. It’s a dream come true, like the pencil neck geek getting a chance to kick sand in the face of the class bully. Moreover, the only folks with lower public opinion marks than politicians are the folks toiling on Wall Street. From a trading point of view the hearings with Goldman Sachs (GS) and others seems more like a sideshow. The public has made up its mind that Goldman did something wrong. The emails unearthed over the weekend add more fuel to that belief and makes anyone standing up for Goldman seem like they have sympathy for the devil. But, there are smart regulations and not so smart regulations evidenced by the fact that reams of rules and regulations already on the books isn’t enough in the minds of many.

It is possible to be for smart regulations that still allow for the circulation of capital and risk taking. I think that it’s possible to want rules for the road without too much government intervention or transfer of power from Main Street to the White House. It is possible to abhor Goldman Sachs but still believe in capitalism. It is possible to present a cogent argument for not going too far in the name of reform and vengeance. It’s possible to do all of those things but it’s not possible to do it without being smeared as an enabler or sympathizer of the unbridled greed that is said to have driven all decisions on Wall Street. You don’t have to like Goldman to understand that many would use the company’s image issue to force through legislation that would make the nation less competitive.

Thank You Sir…May I have Another?

When I was in the fourth grade I went to school in San Antonio, Texas. The first day of school our teacher explained that he would paddle kids that acted up in class. A couple of weeks into the new semester I was the first one in the class chosen for this dubious honor. As the teacher and I marched toward the bathroom tears welled in my eyes and my knees were like Jell-O. I forgot how many whacks I received because I screamed so loud after the first one that it was just hysteria thereafter. By the end of the school year I would practically skip to the bathroom for my paddling. I was so accustomed to them by this point that I’d carry on a casual conversation with my teacher while he was dishing out punishment. “Hey, teach, you got anything exciting going on over the summer?”

I’m reminded of this period of time because Goldman has been getting paddled since they posted first quarter 2009 earnings results. This sort of stuff is old hat for Lloyd Blankfein & Co. The challenge for the CEO of Goldman is to be contrite but not act guilty at the same time. I’m not sure that he’s up to the task but the pounding promises to be severe. Although I was used to the paddling from my teacher, our Vice Principle was a completely different story. Once I was sent to him and he opened a closet that had so many paddles it looked like the warden’s locker in “Midnight Express.” The swagger and smirk was wiped away quickly, and I was back to screaming like a baby. Despite the hype it’s likely that Blankfein will be so engrossed with his answers he will display no emotions, but (Fabulous) Fabrice P. Tourre might shed a tear or two.

The man with the paddle today is Senator Carl Levin (D – Michigan), and he’s champing at the bit. Senator Levin says that “Goldman repeatedly put its own interests and profits ahead of the interest of its clients.” The senior senator from Michigan will say that Goldman made $3.7 billion in 2007 by placing “heavy bets” against the mortgage market. Goldman is going to say the exact opposite, noting “we didn’t have a massive short against the housing market and we certainly did not bet against our clients.” It should make for lively television, but what is really going on and what is the Senate trying to achieve? I’m not a big fan of professional shorts, especially those allowed to destroy small-cap stocks, but betting that a housing market is overheated isn’t the same.

In the case of the shorts that have a free pass to crush the American dream with impunity, the act of shorting makes the likelihood of a company failing more likely. Betting that housing is too strong is like betting the dollar is too weak or hog bellies are undervalued; the act of taking a side doesn’t make the trade profitable. If clients are bullish it shouldn’t dictate a firm to be bullish, too. Still, there is a slim element to this whole mess that will be used to further the real agenda, which is the war on profits. If the world can be intertwined with evil insurance companies, heartless coal mining companies, and greedy Wall Street firms, at some point it becomes the target. Should it turn out that Goldman made $3.7 billion on shorts but lost more on longs in housing how will that be spun? Will hedging be outlawed?

I’m not sure what’s going to come out of today’s hearings except profits are not good when they’re too rich. Rich will be defined by the government and not based on risks taken or percentages of sales but raw numbers. So a company that earned $3.7 billion is obviously making too much even if the profit margin is 5%. This theme will reverberate and become louder until it can be unveiled as a standalone issue.

Dodd Shot Down

Last night a procedural vote failed to garner the necessary votes to move ahead. Republicans were joined by Senator Ben Nelson (D – Nebraska) in opposition to the bill. Two sticking points should be easy to resolve; the $50.0 billion fund to facilitate future bailouts and another consumer protection agency. I’m not sure that there will be compromise on both, but President Obama already hinted the former can be jettisoned. I think that everyone wants a bill so with the proper leadership this will get done.

By Charles Payne, CEO & Principal Analyst

If Goldman broke the law then by all means they should be prosecuted. If Goldman was a bad actor but its actions were legal then go ahead and take them out to the woodshed. Just don’t beat the tar out of opportunities and capitalism under the guise of reform. Moreover, don’t let anti-business bloodlust result in a bill that does nothing about core problems. Keep in mind this legislation goes beyond Wall Street as pointed out in a NY Times article today that says 130 companies including Harley Davidson (HOG) and Mars are paying lobbyist to make sure the bill doesn’t kill their ability to mitigate risks and offset economic pitfalls.

Charles Payne is the CEO and Principal Analyst of Wall Street Strategies . This post was republished, with permission, from his company’s column, WStreet Market Commentary.

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