Bloomberg notes that Goldman’s president Gary Cohn has stated that the firm is not close to a settlement of the SEC’s fraud case against it for one of its Abacus CDOs. Note that this is contrary to rumor and speculation as recent as last week and suggests talks are pretty close to dead. The SEC has widened its investigation against the firm to include additional CDOs, the most recent a 2006 synthetic CDO called Hudson, but it is not yet apparent whether the SEC will file additional charges.
The Goldman announcement is significant because not only is there good business reason for the firm to settle the case, but even the White House is pushing for a resolution. While many continue to assert that the firm’s franchise will be undamaged, that it already no longer true. The case and related scrutiny continues to take considerable management attention and the firm’s once stellar brand is tarnished. Even more important, the firm’s staff are reported to feel beleagured and have fallen into siege mentality. Finally, I am hearing much more discussion of by investors of how the firm front runs them. It appears that persistent and warranted unhappiness over the firm’s persistent business practices is coming to the surface.
It is entirely possible that the two sides have serious outtrades on all the major issues. The SEC reportedly wants a billion dollar fine; that’s outside precedents for the losses investors took on this deal, but the continuing investigations may change that. The SEC also reportedly wants an admission of guilt of some sort, something that Goldman resists, both culturally and from a practical standpoint (it would make private lawsuits easier).
The officialdom has allegedly pushed both sides for a resolution, but Goldman does not appear to be getting the message from the SEC: it needs to do something that is reasonably painful. Given the continued loss of morale, rumors, high potential for more unflattering disclosures (which could have a more serious impact on market and customer perceptions), the firm’s refusal to put this chapter behind it is looking more and more misguided.