The Market Ticker on the Goldman Settlement

21 Jul

Getting a good bead on the Goldman Settlement… Karl Denninger puts it in perspective.

Goldman Sachs Settlement: Yeah, Right

from The Market Ticker by Karl Denninger

Sorry, no $ale over here:

IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that Defendant and Defendant’s agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice ofthis Final Judgment by personal service or otherwise are permanently restrained and enjoined from violating Section 17(a) ofthe Securities Act of 1933 (the “Securities Act”) [15 U.S.C. § 77q(a)]

Oh, so we have to enjoin people from doing that which is already unlawful?  You mean the law itself isn’t enough – we have to sue on top of it?

IT IS HEREBY FURTHER ORDERED, ADJUDGED, AND DECREED that Defendant is liable for disgorgement of $15,000,000 and a civil penalty in the amount of $535,000,000 pursuant to Section 20(d)(2) ofthe Securities Act [15 U.S.C. §77t(d)(2)]. Defendant shall satisfy this obligation by disbursing the foregoing disgorgement and civil penalty pursuant to the Fair Fund provisions of Section 308(a) ofthe Sarbanes-Oxley Act of2002 as follows:

(following a split up alleged restitution and a “fine”)

On first blush this looks pretty strong.  $300 million to the SEC, a “disgorgement” (fine), and then “restitution.”  Further, these amounts are explicitly barred from being offset, and there are enhanced “reporting and surveillance” requirements on a forward basis.

So what’s not to like?

Well, a few things.

  • The amount of the judgment is high, but not enough to deter behavior.  This is the general problem – do this sort of thing 10 times, get caught once, pay one fine, it’s a cost of doing business.

  • There’s no admission of anything beyond “an omission.”  Yeah, right.  Ok.  You’re welcome to believe that.  I do not.

  • Fabrice got hung out like Fabreeze.  Uh, no.  I don’t believe for one second that Fabrice acted without Goldman’s knowledge, either generally or specifically, that this was “common business practice.”  If he had someone would have stomped him before the cops showed up.  They didn’t, and that’s the beginning and end of it.  He gets hung out to dry as he’s not covered by this, and indeed the company is now turned on him as a “star witness.”  In my opinion this is exactly backwards.

In short, there are only two means of enforcement that matter to corporations – either ruinously expensive fines for misconduct sufficient to destroy huge amounts of operating profit and market cap, thereby deterring future acts, and severe and permanent reputational damage – which means an admission of intentional misconduct.

What’s “enough”?  Well, Pfizer paid $1.2 billion, and I argued that wasn’t anywhere near enough.  Indeed, considering it was a second offense it definitely wasn’t enough (what is, for a recidivist?)  Goldman has a market cap of $75 billion (roughly) as of today.  Do you really think that 1/2 of 1% of their market is any deterrent?  No – it is simply a cost of doing business.

Fine ‘em 10% of their market cap - that would get their attention. FAST.  Do that a couple of times and the bad guys are out of business.

This judgment provides no real forward deterrent effect at all, and creates a presumption (in the reader, if not in fact) that the Goldman employee at the center of this effectively acted without the executive hierarchy being aware and approving of his conduct.  I simply don’t believe that.

Yeah, I might believe that there is more to come in this regard, and the SEC News Conference stated as such yesterday afternoon.  I have no idea if that’s smoke and mirrors or reality, nor does it matter.

So long as the SEC continues to bring cases and seek “resolutions” that are not punitive enough to deter future behavior, either in monetary damages or reputational damage, this sort of activity will continue to occur with the “regulatory action” being seen as nothing more than a footnote on the next quarterly earnings report.

That’s unacceptable.


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