Dodgy brochure costs Goldmans $550m

Goldman Sachs admits 'incomplete marketing information' as it's hit by record SEC fine.

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Last Updated: 31 Aug 2010

That seems like an awful lot of money to pay for being a bit sloppy over the small print. And US regulator the Securities and Exchange Commission is certainly bigging up the fact that this is the largest fine it has ever levied - pour descourager les autres, as the French might say.  

But in context Goldmans may well feel that it has got away relatively lightly on this. It’s not so long ago that the SEC was puffing out its chest and threatening to prosecute the bank for fraud, so a fine – however substantial – seems like a good result.

The hoo-hah centres on a subprime mortgage CDO (remember them?) created by Goldmans back in the day and rejoicing in the name of Abacus 2007-AC1. Of course it was far from being the only bank involved in such whiffy ‘assets’ at the time, but there’s rather more to it than that.

The allegations were that Goldman’s staff (including ‘Fabulous’ Fab Tourre) colluded with one of their biggest clients – hedge fund boss John Paulson – in order to defraud a group of other clients into buying a product which they expected to fail. Once sold, Paulson could then bet at the market rate against what looked like a legitimate asset, raking in money on what was in effect a sure thing.

If true, that surely ranks as a pretty extraordinary way to behave. It certainly demonstrates exactly the contempt for just about everyone else that’s at the root of bankers’ deep unpopularity with the rest of society at the moment.

Goldman’s has not admitted the charge (really?). But it has conceded that the marketing information it provided was ‘incomplete’ in that it neglected to mention Paulson’s role in creating the product. Draw your own conclusions from that.

Of course now there is to be no court case we will never know whether it is true – but the reality is that we were never likely to find out anyway. For all its fighting talk the SEC was going to have a very hard time making anything stick to Goldman Sachs, a firm whose savvy and political connections are second to none.

What the regulator did have though was just about enough leverage to persuade Goldmans to settle for a fine. The proverbial win-win – although, as $550m is a mere 1.2% of its net revenues last year and the hapless stooges in the Abacus deal lost about $1bn between them, it’s Goldmans which looks like the real winner. Many were expecting a much larger penalty.

Talking of hapless stooges, one of them was our very own RBS, which took a huge $840m bath on the deal. It’s going to get a bit of that back, a happy and most unexpected turn of events. Admittedly it’s only $100m, but something of a lottery win all the same. The other one, German Bank IKB, recoups its entire loss of $150m, with the balance of $300m going to the US Treasury.

The other big news from Wall Street is that the long-awaited Dodd-Frank financial reform bill has finally been passed. It includes radical new powers to break up institutions if they get ‘too big too fail’ and also effectively bans prop trading by banks and limits their exposure to hedge fund activities.

Whether the bill goes too far or not far enough depends, as usual, on your point of view. But Wall Street seems relieved – bank business models will have to be tweaked rather than torn up and re-invented, so the money will still keep flowing.

Whether Dodd-Frank has the teeth to stop another crash in its tracks is another matter. But it’s a start at least.

In today's bulletin:

Dodgy brochure costs Goldman's $550m
BP manages to plug leak as US finds a new reason to vilify it
Edukashun is in a pickle
Entrepreneurship is on the wane, says survey
O'Leary eats humble pie as he apologises to Sir Stelios

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