This much is clear. We haven’t heard the last about Goldman Sachs’ settlement with the SEC.
Daily Finance has been all over this story. Their reporting details both the short-term benefits and long-term challenges facing Goldman Sachs (GS) as a result of the settlement over its Abacus synthetic collateralized debt obligation (CDO) transaction.
Short-term, they note, it’s hard not to see how Goldman wins. The $550 million fine, while large in an absolute sense, is irrelevant to their bottom line. Particularly when initial estimates had them paying between $1 billion and $5 billion to settle with the SEC.
• It’s 8.9% of the $6.2 billion increase in Goldman’s market value on the day the deal was announced.
• It’s 4.3% of the taxpayer-funded bailout Goldman was handed in 2008.
• It’s a speck compared to the potential damages Goldman could have been assessed.
What is less clear is how the fine will play with Goldman’s public perception. Throughout the financial crisis and subsequent recession, Goldman Sachs has seemed to epitomize what is wrong with Wall Street.
Being seen as paying for their offenses, real or imagined, will be a victory. If Goldman had gone to trial and lost, clearly the damage to its business could have been disastrous. The truth of the matter is that paying the fine shelters Goldman from a conviction, and from expressly acknowledging guilt.
That leaves the impact of a fine as the only way for Goldman to be hurt in the eyes of the public. The question is if the public will perceive this fine as being an appropriate punishment? Probably not.
However Daily Finance reports four consequences for Goldman.
First, while not saying they committed securities fraud, they acknowledged “that the marketing materials for the ABACUS 2007-ACI transaction contained incomplete information. In particular, it was a mistake… to state that the reference portfolio was ‘selected by’ ACA Management LLC without disclosing the role of Paulson & Co. Inc…. and that Paulson’s economic interests were adverse to CDO investors.”
Since failure to disclose that information was at the heart of the SEC’s complaint, it’s odd to see that acknowledgment even as Goldman is not admitting the SEC’s allegations. If it was a mistake not to include certain information, if the documents were incomplete without it, then it seems Goldman is conceding the information was “material,” which would make its omission securities fraud, and could possible empower other plaintiffs to seek damages from Goldman Sachs by defining the Paulson information as a material omission.
Second, the language of the settlement will force Goldman to do more damage control with its client base. Even though the “acknowledgment” is limited to this one case, in the face of it how can clients feel secure that Goldman has always and will always tell them all important information?
Third, part of the settlement requires Goldman’s cooperation to any SEC demands in any other “related” SEC investigation, giving the SEC carte blanche to access Goldman’s records and people. If Goldman fails to respond as asked by the SEC, the SEC can go back to court and increase the $550 million fine, while Goldman has little ability to defend itself.
Finally, the injunction Goldman agreed to technically allows Goldman’s broker-dealer to be disqualified from the securities industry. In theory that’s really big because by definition, a broker effects transactions in securities for others, and a dealer does them for its own account. That is, the Goldman entity that most needs to be allowed to work in the securities industry faces disqualification because of this injunction.
All of which says we haven’t heard the last about this settlement.
