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Thursday, July 15, 2010

A good weekend for Goldman

In case you missed it, Goldman Sachs has settled its case with the SEC for 550 million dollars, pending approval by Judge Barbara Jones.  Given the fact that the media pundits had previously speculated that Goldman would pay as much as 1Billion or far more, this has to be a good weekend for Lloyd Blankfein, particularly since the firm is not even required to admit the SEC's allegations other than to say that it regretted that its marketing materials were "incomplete" in that they failed to disclose that John Paulson was shorting the synthetic collateralized debt obligations (CDO's) that Goldman was marketing. 

As for the SEC, it gets to say that this is the largest SEC fine in history levied against a financial institution.

Forbes, and the WSJ online have both suggested that the episode has damaged Goldman's reputation.  Sorry, but I'm not buying it.  A fine that is half of what the media speculated, paired with no significant admission of wrongdoing, does not tarnish Goldman's reputation one bit with either its customers or its investors.  A recent report by Andrew Ross Sorkin in the New York Times Dealbook suggested that most of Goldman's customers were staying put.  As for investors, consider this: as a result of after-hours trading, Goldman's stock is currently trading in the neighborhood of $153 per share, up from $140 just one day ago.  True, the stock was trading at $182 in April, before the SEC filed charges, but Goldman will now be able to credibly claim that the worst of their troubles are behind them.

Is this a good or bad thing?  Depends on your view of the underlying conduct.  I myself have always been partial to the claim that these were sophisticated clients and the fact that there was a short matching the long should not have been so surprising to anyone. Moreover, some of the information that CNBC reported following the filing of the complaint undermined claims that Goldman was misleading anyone (see Kim Krawiec's reaction to that information here, at Faculty Lounge, which links back to several of her very thoughtful posts on the topic). 

My own intuition has always been that this case was fueled 50% by allegations of fraud (stoked in large part by NYTimes reporting), 10% by concerns about the extent of Goldman bonuses (an example of which is referenced here in Huff Po), and 40% by anger connected to the AIG bailout (notice the criticism cited, toward the end of the NYT's article, that the settlement represents a "fraction" of what the US taxpayers paid to bail out AIG).  Thus, for me at least, the charges have the appearance of being pretextual: that is, that the SEC was at least partially filing charges for one set of reasons when in fact the "true" impetus for punishing Goldman was connected to a different set of reasons.  Years ago, Bill Stuntz and Dan Richman wrote an article that identified some of the problems with pretextual prosecutions in the criminal sphere.  To quote their SSRN abstract: "Far too little attention is given to the strong social interest in non-pretextual prosecutions, and to the ways in which identifying a defendant's true crime promotes prosecutorial accountability and deterrence."  The transparency, accountability and deterrence concerns that Stuntz and Richman raised in the criminal context should apply equally in the regulatory enforcement sphere.  Indeed, today's settlement only heightens the transparency and accountability concerns, since we will never know for sure what actually happened.

In any event, it's a good weekend for Goldman, a decent weekend for the SEC, and a very very good weekend for the exhausted lawyers who have been working on both sides of the case.  Maybe they can all get some much deserved rest.

  

Posted by Miriam Baer on July 15, 2010 at 08:25 PM | Permalink

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