NEW YORK ( TheStreet) -- Goldman Sachs ( GS) may rue the day it got into bed with the U.S. government, if trends in public opinion continue to develop. From a Rolling Stone expose to political pundits and concerns about high-frequency trading, Goldman Sachs' name keeps turning up. Now, The Wall Street Journal is asking questions about its "trading huddle," where analysts and traders discuss thoughts on the market and, in at least one case, offered meeting advice that differed from a published report. On the surface, it doesn't appear that Goldman did anything illegal, nor is there clear evidence of unethical behavior. The meetings were focused on short-term trading ideas, not long-term ones found in analyst reports. Furthermore, one might ask why an investor or trader would be a client of Goldman Sachs if it didn't deliver an edge. Nevertheless, FINRA and the SEC want to investigate the matter. It's a good idea, if for nothing else than to clear the air, but it's yet another case of the regulators acting after the public dissemination of information. Government regulators and (formerly) quasi-government entities such as Fannie ( FNM) and Freddie ( FRE) were complicit in the financial crisis because their name was a stamp of approval; subprime debt gained legitimacy because Fannie and Freddie were buying it. The SEC approved the rating agencies that gave triple-A ratings to garbage. And many investors are cavalier about who they invest with because they believe the SEC is watching their back. Madoff and R. Allen Stanford proved otherwise. Instead of focusing on this specific incident, which doesn't yet show evidence of clear wrongdoing, I'd ask why the Journal ran this story on the front page. And I believe the answer is that the public is not happy with financial institutions in general, and certainly not with firms that have benefited directly, such as JPMorgan ( JPM), Citigroup ( C), Bank of America ( BAC) and AIG ( AIG) (through cash infusions) or indirectly, in the case of Goldman Sachs (through the selective bankruptcy of the competition, and cash infusions that passed through other firms).
On top of that, the firms' close ties to the federal government raise the ire of taxpayers miffed about huge deficits . The end-result is likely to be tougher-than-expected regulations. As much as corporations are able to lobby Congress for favorable outcomes, they are almost powerless against widespread negative public opinion. Politicians who might normally favor less stringent changes will not step in front of a runaway train. President Obama and the Democrats are already looking at large losses in 2010 due to their botched efforts at health care reform. Deficits, climate change, bailouts and the stimulus are all losers for the party heading into next year, as things stand today. Financial regulation could be an easy win because Republicans won't want to be seen as defending financial institutions. ETF investors need to consider potential new regulations as part of their long-term planning. Commodity and leveraged ETFs have come under attack and regulation could eventually change the way investors access these asset classes. Financial regulation will be even more far-reaching, affecting everything from insurance to mortgages. Public sentiment suggests the industry is about to land in the government's crosshairs. Regulatory agencies shouldn't think they're safe, either. Inter-agency turf wars are under way and the Federal Reserve seeks to expand its power, even at the expense of the SEC. But the Federal Reserve is also a target of the public. House and Senate bills calling for an audit of the central bank gain more and more co-sponsors over time, with the House already at an absolute majority. The Great Depression saw the creation of regulatory agencies and expanded the powers of the Federal Reserve, but citizens considered government and business to be distinct entities. Voters aren't as naive today, and the line between the two is as thin as ever. This time, reform may target government and business with the same intensity. The risk of collateral damage is high. -- Written by Don Dion in Williamstown, Mass.