American financial sources told The Slog last night that the Securities Exchange Commission ‘is convinced’ that other banks have been conflict-hedging and misleading clients for some time.

“It’s not that Goldman Sachs is the tip of an iceberg” said one, “So much as they’re just the biggest iceberg of several”. This will be small consolation for those investors who have been hoodwinked by large US institutions. And certainly, it goes another step towards a general indictment of capitalist investment banking as currently practised. Magnetar,Tricadia. Merrill and UBS are already the subject of investor lawsuits…and apparently on the SEC’s hitlist as purveyors and recipients of crooked CDO selling.

Collaterised Debt Obligations (CDOs) are packages sold and backed up by security of one form or another. If you sell them knowing full well that other policies you are following as an institution might make the collateral security worthless, then obviously you’re cheating. But it seems as though everyone’s been doing it.

CDO investors with Goldman Sachs were led to believe that the source (Paulson & Co) had interests aligned with theirs. In fact, Paulson had not only taken out a massive insurance hedge to produce profit when (not if) the security failed – it was sold the hedge by none other than Goldman Sachs. This is collusion and fraud….and common practice.

Doing this is a bit like hosting a game of Russian roulette in which the hosts know where the empty chambers are, and all the players die. It makes Credit Default Swaps look positively sensible and squeaky clean. But here’s a corker: the slang for this in US investment circles is ‘positive carry’. Or heads we win, tails you lose.

What Communism spectacularly failed to do, the financial and banking sector is doing to itself. As today’s earlier posting argued, we don’t need to save these snakes from themselves: we need to save capitalism’s reputation from their poisonous bite.