Issue of the week: Did Goldman get off easy?

last updated 8 January 2015

Goldman Sachs has just cemented its reputation as a very sharp dealmaker, said Daniel Gross in Slate.com. The Wall Street firm last week settled the sensational lawsuit brought by the Securities and Exchange Commission in April alleging that Goldman helped structure a mortgage security that was designed to fail and sold it to unwitting clients. Had the government prevailed in court, Goldman might have been ruined. Instead, Goldman agreed to pay $550 million to settle the matter while admitting no wrongdoing. This may turn out to be Goldman’s “best trade ever.” Sure, $550 million sounds like a lot of money, and indeed, it represents the biggest settlement in SEC history. Yet it amounts to a mere two weeks’ worth of Goldman’s first-quarter profits. And the best part (for Goldman, that is) is that the firm “is allowed to tell the public and its employees that it didn’t really do anything wrong.” It merely acknowledged that it made “mistakes” in its disclosures to investors. And of course, CEO Lloyd Blankfein gets to keep his job.

Yes, but he will now preside over a chastened and vulnerable firm, said Tom Adams and Yves Smith in finance blog NakedCapitalism.com. The fact that so many commentators are painting the settlement as a victory for Goldman “is in large measure due to the firm’s skillful manipulation of perceptions.” But Goldman has been hurt. Although the firm technically did not admit wrongdoing, “the settlement amounted to the same thing.” So it will likely embolden other investors who lost money on similar doomed-to-fail mortgage securities to seek redress, and they can be expected to “push for and win major damages.” And the settlement deal explicitly states that the SEC retains the right to inquire further into Goldman’s mortgage business. What other skeletons might be lurking there?

That’s an empty threat, said Tunku Varadarajan in TheDailyBeast.com. “The suit was all a charade,” staged to convince the public that the government was going to throw the book at those “rich and evil bankers.” And it worked. The suit helped grease the rails for the Obama administration’s financial-reform bill, and once it accomplished its purpose, the suit was settled—by a curious coincidence, on the same day that Congress passed financial reform. You have to admire the “beautifully cynical choreography.” They certainly must be admiring it over in Goldman’s new billion-dollar headquarters, said Felix Salmon in Reuters.com. True, “clients will probably never trust Goldman as much as they did before. But that was true even before the SEC brought its case.” And since the firm didn’t have to apologize or fire any senior managers, the settlement “will only serve to exacerbate its arrogance”—if that’s possible.