It's hard to judge who ultimately won in the settlement between Goldman Sachs (GS) and the Securities and Exchange Commission because some provisions may have major, negative impacts for Goldman in the future. However, in the short run, and in the court of public opinion, Goldman clearly wins. That's because $550 million is a trivial amount to Goldman even if it is very large in an absolute sense. Since Goldman is not formally admitting guilt, the fine's irrelevance to Goldman's bottom line is all that matters at the moment.
In the public imagination, Goldman has become the face of the Wall Street evildoing that brought down the financial system and triggered the Great Recession. So what matters to public opinion is whether the government is making Goldman pay for the pain ordinary people feel from those calamities.
Convicting Goldman at trial would have been convincing; so would forcing a guilty plea in the settlement. But for a no-wrongdoing-admitted fine to make the SEC look like the righteous champion of the people, the fine has to hurt Goldman. The pain of the fine would have been the tacit admission of guilt that made the agreement not to admit wrongdoing a legalistic formality. And this fine just doesn't hurt. (Yes, technically the agreement is that Goldman is neither admitting or denying the allegations (Consent at paragraph 2), but what counts to most people is that Goldman is not admitting them.) Moreover, since the settlement removes an ugly cloud over Goldman that could have involved far worse outcomes, the settlement helps Goldman financially, as the market's reaction shows. (Here are links to the Consent and the Proposed Judgment.)
The "Acknowledgment" of Guilt
Whether the public will notice or not, however, the settlement does contain some pain for Goldman. First is the possible consequences of Goldman's acknowledgment
"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." (Consent at paragraph 3.)
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. (Indeed Senator Levin is spinning this language as an acknowledgment of "wrongdoing.") 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. Unlike a big (to Goldman at least) fine, however, this acknowledgment is not enough to put the lie to that failure to admit guilt in the public's mind.
Only in the land of legal language, where the meaning of "is" can be ambiguous, can Goldman make the acknowledgment it has and still not admit it committed securities fraud. In giving up Goldman's formal admission of guilt for this language, the SEC hurt its own image but possibly empowered other plaintiffs, simplifying their efforts to make Goldman pay by essentially defining the Paulson information as a material omission.
Even if the language doesn't end up helping other plaintiffs, however, it probably forces Goldman to do more damage control with its client base. Institutional and other big investors aren't dumb, and will recognize that Goldman is essentially saying, yes, SEC, you're right, we failed to disclose material information to the people we sold securities to. 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?
If nothing else, this part of the settlement forced Goldman to show a little humility, saying it "regrets" not making the disclosure. Of course, expressing regret isn't quite the same as making an apology.
Impact on Other Investigations
Part of the settlement requires Goldman's abject capitulation to any SEC demands in any other "related" SEC investigation, giving the SEC carte blanche to access Goldman's records and people (Consent at paragraph 17, Judgment at IV). 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.
Although Goldman's press release suggests that no future cases against it will come from these investigations, it may be too early to be sure. It's also not obvious how narrow "related" investigation is; perhaps the SEC can use its access to Goldman to ferret out wrongdoing by other Wall Street players. Perhaps it's so narrow it doesn't go much beyond the case against Fabrice Tourre. If "related" is broad enough, the SEC got a significant victory in this provision, again, not one the public is likely to appreciate.
Goldman's Continuation in the Securities Industry
The injunction Goldman agreed to, while nonsensical to the public at large because it merely requires Goldman to comply with the law going forward, technically allows Goldman's broker-dealer to be disqualified from the securities industry. (Consent at paragraph 14.) 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.
The only way Goldman can stay in? By getting an exception to the rule. The SEC has granted Goldman exceptions in the past, and I find it impossible to imagine that the SEC would kick Goldman out. But on the way to staying in, the SEC has another hammer to hold over Goldman's head.
(Editor's note:For a more accurate, fuller explanation of the Goldman injunction, please see this later article, published on July 25, 2010.)
Finally, Goldman agreed to change the way it does business in regard to residential mortgage backed securities for three years, in ways that increase accountability such that a "rogue trader" defense to cases originating in those years would fail. (Consent at paragraph 7, Order at III.)
The Fabulous Fab
Speaking of rouge traders, the settlement also means that the SEC is continuing its case against Fabrice Tourre. That's not only bad news for him, but possibly also for Goldman. If the SEC's case is strong enough, Tourre may want to cut a deal, testifying about wrongdoing by Goldman higher ups. Does Tourre have anything he can offer? Only time will tell.
Will the Judge Pull a Rakoff?
A final, and major hurdle for this settlement is getting it approved by U.S. District Judge Barbara H. Jones. The SEC's last major civil settlement with a Wall Street firm -- its case with Bank of America -- was rejected by U.S. District Judge Jed Rakoff as too lenient, and very reluctantly approved after strengthening. Judge Rakoff is not the only Southern District of New York judge to reject a settlement as too weak; Judge Alvin K. Hellerstein did it in the 9/11 workers case too. Will Judge Jones follow her colleagues and demand more in this case too?