Goldman: No SEC Settlement Imminent

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.

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  1. Doug Terpstra

    So it is Goldman digging heels in and not the SEC? Perhaps, beyond civil clawbacks, Goldman is afraid an admission could actually leading to felony fraud convictions and prison.

    Oh, wait, there’s this bit “…even the White House is pushing for a resolution.”

    Que sorpresa! Let sleeping dogs lie; let bygones be bygones; look forward not backward; mistakes were made…can’t we all just get along? By sweeping all crimes under the oval carpet, this castrated administration is turning into a rug for Wall Street and warriors to stomp on. In being obsessively conflict-averse, it only courts greater confrontation ahead.

  2. Francois T

    “even the White House is pushing for a resolution”

    Apart from the WTF would they want a resolution, (campaign contributions perhaps?…nah! can’t be!) I would translate “White House” by T3 droid (Turbo Tax Timmy)

    This Administration is bathing in cowardice and “centrism” it’s not even funny.

    Another explanation could be that:

    Report: More than 1,400 former lawmakers, Hill staffers are financial lobbyists

    Even for Washington, the revolving door between government and Wall Street spins at a dizzying pace. More than 1,400 former members of Congress, Capitol Hill staffers or federal employees registered as lobbyists on behalf of the financial services sector since the start of 2009, according to an exhaustive new study issued Thursday. The analysis by two nonpartisan groups, Public Citizen and the Center for Responsive Politics, found that the “small army” of financial lobbyists included at least 73 former lawmakers and 148 ex-staffers connected to the House or Senate banking committees. More than 40 former Treasury Department employees also ply their trade as lobbyists for Wall Street firms, the study found, reports Dan Eggen.

    Dick Durbin was right: They own the place!

  3. J Me Dimon

    “I am hearing much more discussion of by investors of how the firm front runs them”

    So unnamed “investors” have unspecified allegations of front running. If that really were true, why do so many people trade with GS? It’s not like there’s no one else to trade with. Come on now. This is just yellow journalism.

    1. Yves Smith Post author

      You are revealing you don’t know much about institutional trading and are therefore not qualified to cast aspersions.

      First and foremost, front running is illegal ONLY in markets regulated by the SEC, which means exchange traded instruments. That’s a small proportion of the markets in which GS operates.

      Second, an investor can only trade with firms with which it has an account. There are not many firms in the prime brokerage business. Goldman is one of them. So hedgies have a small number of choices. Most have more than one PB, the bigger ones have three or more. So they’ll wind up at Goldman. They also NEED to spread their business around to avoid any one counterparty having too good an idea of what their positions are. Thus Goldman will inevitably get a decent percentage of their trades.

      Third, many (as in most) fund managers are at big firms where they do not control who the firm trades with. It’s a house decision. Being with Goldman is like buying IBM.

      Finally, I have heard these charges, with detail, from senior individuals in the industry who have stellar reputations and would not make these charges lightly.

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