The blogosphere seems somewhat undecided about whether or not the SEC settlement will be a net positive for Goldman. Felix thinks it is definitely a win for Goldman. Ritholtz disagrees. Tom Adams (on Naked Capitalism) is somewhere in-between. For what it is worth, I am inclined to agree with Felix on this one. I also think the settlement shows why financial reform will be a disaster.
The bottom line on this settlement is that it is, as Bloomberg put it, “affordable.” The possibility of being branded with securities fraud placed the entire firm in a precarious position. The SEC could have stuck Goldman with some multiple of the amount that the agency ultimately accepted. It did not. It could have made the firm make a more powerful statement of responsibility. It did not. It could have forced management changes on the firm. It did not. Why? Given what I know about the mechanics of the transaction and having seen the materials available to investors, I am not willing to accept that the SEC was negotiating from a position of weakness here. How do you get this outcome from those circumstances?
The most obvious answer is that the decision to sue Goldman was entirely politically motivated. The timing of the announcement – less than two hours after the financial reform legislation cleared the Senate – and the fact that this case was directed at the most prominent populist target seem to support this theory. Once the threat to Goldman lost its immediate pragmatic value, they let go.
Wait a minute, you say. How can The Powers That Be simultaneously want to reform Wall Street and be indifferent to whether a prominent Wall Street firm “gets the message” that it should play fairly? Does that not seem contradictory?
Only if you think anyone in Washington that is elected or appointed actually gives a damn about financial reform, and they do not. This piece of legislation was about the outcome of primary elections and having a victory to claim come November. If anyone cared about changing Wall Street, they’d be figuring out how to smash the major players to pieces. Instead, they are largely rewarding the very same regulators that enabled the financial crisis in the first place with more powers not to exercise and hosting fundraisers before they vote.
The thing to take away from this settlement is that in a world where financial institutions are allowed to grow to a level of influence where they cannot be unwound without significant economic consequences, they will not be meaningfully disciplined. Those in a position of authority are removed enough from reality to believe that no one has caught on to this game yet.
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