Making the banks pay: Goldman Sachs furore provides politicians with an excuse for more regulation

The 31-year-old director may have had a formidable reputation in elitist investment banking circles, but to the rest of the world he could have been any one of the well-heeled staff who every day walk briskly and determinedly through the glass doors of Goldman – both in New York and at its London headquarters at 133 Fleet Street.

Until recently, Tourre, who was so taken by his own talents that he referred to himself as "the fabulous Fab" in some e-mails, enjoyed a luxury lifestyle akin to that of many Hollywood film stars – flash holidays, fast cars, a pad in a fashionable part of town and a million pound bank balance. But he was able to enjoy the high life without the drawbacks of celebrity and the inconvenience of the paparazzi recording his every move.

But on Tuesday all of that will change when the world is expected to get its first glimpse of the banker who is at the source of the latest financial debacle.

Tourre, who has been charged by the US Securities and Exchange Commission (SEC) with suspected fraud, will get a taste of life in the limelight when he is expected to appear before a panel of US politicians.

He will arrive at the US Senate to a flood of flashbulbs as it is anticipated that he and Goldman's chairman and chief executive, Lloyd Blankfein, will mount the bank's first public defence against the allegations which caused markets worldwide to plummet when they were revealed late on the afternoon of 16 April.

Although Goldman was first issued with a "Wells Notice" – a warning that the SEC intended to file charges – last July, the public disclosure of the charges ten days ago rocked banking and political circles on both sides of the Atlantic.

In the UK, the case has taken on particular importance as Royal Bank of Scotland has been cited as the biggest victim of the alleged $1 billion (651m) fraud, with lawyers advising that it would have a strong case to pursue Goldman for compensation if the SEC succeeds in proving its case in the US civil courts. With general election fever at an all-time high, Prime Minister Gordon Brown even took the unusual step of labelling Goldman "morally bankrupt", while opposition MPs have launched a campaign to have the bank struck off the lucrative government advisory roster.

While Goldman itself has vigorously protested its innocence – claiming that the charges are "completely unfounded in law and fact" – the episode has re-opened old wounds over the 2008-09 banking crisis. Analysts say it has given politicians on both sides of the Atlantic the excuse they have been waiting for to revisit unfinished business over regulation and the future shape of the banking industry.

Although the charges, which revolve around a mortgage-backed investment vehicle called Abacus, are complex, the City points out that they have handed the three main political parties here in the UK, and US president Barack Obama, a weapon with which to stage another attack on the vote-winning issues of banking reform and regulation.

Abacus was a fund based on collateralised debt obligations (CDOs) – just one of the labyrinthine products constructed during the boom years to help investors with a penchant for placing large bets to pocket billions. But they have since been grouped with other high-risk "rot" which was allowed to fester at the heart of the banking industry, and which precipitated the worst collapse of the global financial system in living memory.

Although CDOs as a whole are politically unpopular, analysts say the charges against Tourre and Goldman provide politicians and regulators around the world with easy fodder as they involve all of the right vote-winning ingredients for attacking the world's biggest bank, whose merciless money-making tactics are so unpopular with the general public that Rolling Stone magazine once called it "the great vampire squid wrapped around the face of humanity".

Also involved is an ber confident, highly paid Goldman Sachs director – Tourre – who loved to blow thousands on the kind of lavish parties that make the general public balk. And then there's the question of John Paulson, the billionaire hedge fund manager, who is not under investigation by the SEC but who walked away from the financial crisis with billions after asking Goldman to devise an investment that would allow him to profit from poor Americans failing to meet their mortgage repayments.

Tourre and Goldman are accused of creating a product at Paulson's request that was essentially doomed to failure due to the fact it was pegged on toxic sub-prime mortgages. The SEC is investigating whether the bank misled other investors who bet against Paulson over the contents of the fund as well as insurers including the Dutch bank ABN Amro, which was taken over by RBS in 2007. ABN agreed to insure Goldman against one of the investors – ACA Management – defaulting.

According to the SEC's case, the nature of the Abacus fund was such that ACA was only ever going to default, so ABN, by then owned by RBS, was doomed from the outset to pay out millions. RBS is estimated to have lost $841m on the fund.

Last Thursday, Obama gave a taste of how politicians and regulators are likely to respond to the Goldman revelations when he delivered a speech at New York's Cooper Union building, just a few blocks from Wall Street, repeating his case for further stringent financial regulation.

Obama rallied support for his bank regulation bill – the most radical attempt to overhaul the US financial system since the 1930s – which proposes creating a mechanism to liquidate large interconnected financial firms which at the moment are considered too big to fail. The bill would also impose regulatory oversight on the unpopular and controversial derivatives market.

"A free market was never meant to be a free licence to take whatever you can get, however you can get it," Obama said. "Some on Wall Street forgot that behind every dollar traded or leveraged, there is a family looking to buy a house, pay for an education, open a business or save for retirement. What happens here has real consequences across our country."

According to Colin McLean, managing director of SVM Asset Management, the Goldman Sachs allegations, whether they are proved or not, are unlikely to have a long-term financial impact on the US giant. Despite an initial plunge in Goldman's share price when the news broke, the market response has since been muted.

Where the case will have a lasting effect, he says, is in providing a timely excuse for governments to push through long-term banking taxes and regulation. While ideas such as separating the "casino" element of banks from retail customers' deposits have been debated ad infinitum since the banking crisis, McLean expects they could soon come to fruition, particularly if there is a change in leadership in the UK.

McLean says: "For politicians on both sides of the Atlantic, it (the Goldman case] gives good reason to both be a bit tougher on regulation and also on tax as well. That's why it will have more political (than financial] ramifications."

Whereas previously banking reform has been castrated by a lack of international agreement, McLean believes that politicians in most of the leading economies will use the Goldman affair to push through long-awaited reforms – in particular a move to introduce more permanent taxes on the banking sector.

Although banking reform has so far taken a back seat in the UK general election campaign as politicians fight it out over how to cut the budget deficit, McLean expects the debate around "narrow banking" to rear its head again if voters choose to oust Labour on election day.

He says: "The political incumbents are rather too tied to the (banking] system we have now, and if there are changes in leadership we are going to see that view change."

Jeremy Batstone-Carr, head of private client research at Charles Stanley stockbrokers, agrees that the Goldman charges will have long-term ramifications for the banking sector as a whole. "It will resolve itself in tougher regulation," he says. "Barack Obama in particular is no poster boy for Wall Street and one should not underestimate his determination to bear down on what he perceives were the perpetrators of the economic and financial crisis."

He also expects that the Goldman charges won't be the last cases to emerge from the ashes of the financial crisis.

George Godber of Matterley Asset Management argues that the City is already nervous about what the case will mean for long-term market regulation.

So as Tourre and Blankfein prepare to face the music this week, analysts say there will be few winners from the Goldman case, other than those pushing for new regulations.

Controversy a boost for RBS – and Sir Fred Goodwin

The Goldman Sachs allegations have caused ripples throughout the banking industry as other institutions have also found their share prices under pressure.

One major exception is Royal Bank of Scotland, which has enjoyed a 14 per cent surge in its stock over the past five days.

Investors are banking on RBS pursuing Goldman for some of the $841 million (550m) the Securities and Exchange Commission says it has lost as a result of the alleged fraud.

The boost to RBS shares over the past week has taken its stock above the crucial 50.2p break-even mark, which means the taxpayer is sitting on a 5 billion profit on the 45.2bn lifeline extended to the Scottish bank.

The Goldman controversy has also afforded RBS's former chief executive Sir Fred Goodwin a rare opportunity to recover part of his reputation.

Last week those who felt Goodwin may have been unfairly treated reminded us that in 2008 he took the US bank to task when he heard that some of its traders were betting on a slump in the RBS share price at the same time as Goldman was pocketing fees for underwriting RBS's 12bn emergency rights issue.

According to some analysts, the question over whether some of the positions RBS inherited from ABN were based on misleading information is likely, in hindsight, to soften some of the blame levelled at Goodwin for proceeding with the takeover even though it later brought the bank to the brink of collapse.