Good Honest Dollar $$

According to an article in The Australian a couple of weeks ago, executives of Goldman Sachs told managers earlier this month to ensure that reaction inside the bank was subdued regarding the announcement on July 15 of a settlement concerning the firm’s highly publicised dispute with the Securities Exchange Commission (SEC).

Cheering or other forms of celebration, they feared, would damage the firm’s reputation beyond what had already occurred since the announcement of the SEC action last April.

(The settlement, under which the bank agreed to a penalty of $US550millon, represented the largest fine ever imposed on a Wall Street firm to-date.)

Good thing too. The settlement has removed a great deal of uncertainly for Goldman. But it was not a cause for celebration, especially given the prospect of further legal action – not to mention the damage which the bank’s reputation has suffered as a result of these events.

About the settlement
Announced on July 15, the settlement relates to charges against the firm brought about by the Securities Exchange Commission (SEC) in April for defrauding investors by misstating and omitting key information about ABACUS 2007-AC1 (ABACUS), a financial product it sold to two institutional investors as the American housing market was faltering in 2007.

Under the terms of the settlement, Goldman has admitted that marketing materials relating to the transaction in question contained incomplete information. The bank has accepted a fine of $550 million and has also agreed to undertake appropriate remedial action with regard to practices in its offering of mortgage securities.
 

Worries not over
To be sure, from Goldman’s point of view, the settlement does remove a great deal of uncertainty. Better yet, they actually got a fairly good deal: the amount paid is well below worst case scenario predictions (some analysts were tipping $1billion or more – refer article) and no departures at senior levels were required. Things could have been worse.

Still, their problems are a long way from over. For one thing, there are obvious concerns about the settlement serving as encouragement for further legal action from investors who lost out on other Goldman products. Already, Australia’s Basis Capital is asking for $US1billion in damages plus recoupment of initial capital relating to the sale of Tiberwolf securities in 2007 (refer article).  Royal Bank of Scotland (RBS), too (whose subsidiary ABN Amro lost $841 million through the provision of credit insurance on the ABACUS transaction), is widely rumored to be considering its options.

And let’s not forget the ongoing criminal investigation into the bank and its employees by US federal prosecutors either.

Credibility damage
Moreover, the settlement does serve as a blow to Goldman’s credibility.

Granted, the settlement did not constitute an admission of guilt. Nevertheless the fact that Goldman were willing to settle for that amount of money does suggest that they had a case to answer. And given how quickly they caved in, the firm’s initial response (where they dismissed the complaint as being ‘unfounded in law and fact’) does now look a little nonsensical.

For Goldman, this matters. Ranked eighth in Fortune’s 50 Most Admired Companies (refer Goldman Media Awards site), the firm’s standout reputation amongst its peers, along with the prestige associated with its name, has long been a crucial source of competitive advantage.

Hold the Celebrations
Throughout its history, Goldman has had many achievements to celebrate.

In the past six months alone, these include awards such as Euromoney’s Best Global Investment Bank (Jul 2010) and Investment Dealer’s Digest’s Bank of the Year (Jan 2010) as well as inclusion in Business Week’s 20 Best Companies for Leadership (Feb 2010) – and these are just to name a few.

These awards are a credit to Goldman (as are the stellar returns the firm delivers to shareholders so consistently). Celebrations relating to achievements like this are more than justified.

Not so for the ‘award’ from the SEC of Wall Street’s largest ever financial penalty. No matter how much of a relief the settlement might have been, its announcement was no cause for celebration. Any cheering would rightfully have caused further damage to the bank’s reputation.

Goldman was right to be relieved. It was also right not to open the champagne.

That should only happen at times worthy of celebration.

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