Goldman Sachs has agreed to pay a fine of $550 million to settle fraud charges brought by the Securities and Exchange Commission. This means that the bank will avoid a court case so we will never know whether they really did dupe investors into buying products that were designed to fail.
If you are interested in the details, this Wikipedia entry gives some of the background and New York lawyer Abigail Field discusses the legal issues on her blog here and here. In short, though, the SEC and a number of Goldman investors alleged that the bank created mortgage-backed securities that were secretly designed to fail so that its key clients could make huge profits by betting against them.
It started to look very fishy when it emerged that one of the investors, Paulson & Co, which profited from short-selling these securities, had actually helped to design the products and had selected the mortgages which underpinned them.
Goldman Sachs says this is perfectly reasonable as all the investors knew what they were getting into. The bank’s only ‘mistake’ was that it forgot to tell those who invested in these securities that Paulson had helped to design them.
And there the matter will rest because, by agreeing to the fine, Goldman has ensured that none of the details will come out in court. The Guardian describes the fine as a humiliation for Goldman but US commentators, and the markets, are in no doubt about who has won. The Washington Post’s Matt Miller reminds us that $550 million is only two weeks’ worth of Goldman’s earnings. Market analyst Kevin Caron points out that the share price rally resulting from the out-of-court settlement was worth $800m, which more than cancels out the fine. The New York Times concludes that Goldman CEO Lloyd C. Blankfein’s position is now secure.
Why should this worry anyone in the UK? Well one of the dupes on the other end of the deal was good old RBS which will get back $100m of its $840m loss. That’s better than nothing, I suppose, but there is a broader issue too. This whole story stinks. We will probably never know the full extent of what happened but even the bits we do know cast further doubt over the whole investment banking industry. Is it really normal for a bank to have people involved in designing products when it knows those same people are going to bet against those products? Come on, if that isn’t illegal it is surely immoral.
Just as smelly is Goldman’s agreement that it will “cooperate in the proceeding against Fabrice Tourre” one of its employees who was involved in the design of the mortgage-backed CDOs and who was silly enough to boast about it. This is yet another attempt to individualise a problem that is actually systemic. As with all so-called rogue traders, from Nick Leeson onwards, we are expected to swallow the line that one particularly crazy or greedy employee overstepped the mark and did something which contravened the bank’s usual ethical standards. As things stand it looks as though the trial of Fabrice Tourre is set to go ahead. Will he too end up doing some kind of deal or will he go to court and lift the lid on the whole murky affair?
For the moment, at least, Goldman Sachs is off the hook and free to carry on pretty much as before. Joshua Brown at Forbes sums the case up:
Remember kids, crime never pays, but institutional influence and deep pockets can absolve you of anything.
And Goldman Sachs has very deep pockets.