Legal experts will argue over who got the best deal -- Goldman Sachs Group Inc. or federal regulators -- in the record fraud settlement announced Thursday. But one thing seems certain -- the investing public didn't.
The lawyers at the Securities and Exchange Commission went into negotiations seeking a record penalty, perhaps as high as $1 billion, according to Wall Street reports. It also wanted Goldman to plead guilty to at least one count of failure to disclose material information to investors in one of its subprime mortgage deals, sources said.
In contrast, Goldman wanted to avoid any guilty plea. It also sought a global settlement that would end all SEC and criminal inquiries of any other subprime or other questionable transactions.
Both Goldman and the SEC got a little and gave a little in the settlement, which still must be approved by a federal judge.
Instead of $1 billion, Goldman general counsel Gregory Palm agreed that Goldman would pay a total of $550 million -- $15 million in disgorgement of profits and $535 million in civil penalties.
That let the SEC's director of enforcement, Robert Khuzami, triumphantly announce, "Half a billion dollars is the largest penalty ever assessed against a financial services firm in the history of the SEC."
But the amount pales in comparison to Goldman's more than $13 billion profits last year, as well as to the $13 billion of taxpayer money the investment company received through the U.S. government's bailout of American International Group Inc., in late 2008. The penalty also represents only about half of the estimated $1 billion the SEC had alleged that investors had lost in the subprime deal.
Cornelius K. Hurley, director of the Morin Center for Banking and Financial Law at Boston University and a former Federal Reserve lawyer, told The New York Times that the dollar amount would not dent the public anger at the banks.
You have to consider the symbolism of the SEC's case," Hurley told the Times. "The public wanted to see either more financial pain or actually have a trial."
On another front, Goldman won its fight to avoid a guilty plea in the settlement. The SEC backed down and allowed the company to "neither confirm nor deny" the charges in the settlement. That concession will certainly help the company as it faces a horde of shareholder and derivative suits.
But the SEC added several qualifiers. For example, in future proceedings with the agency, Goldman cannot deny the allegations of fraud in the complaint.
And the agency forced Goldman to "acknowledge" that the marketing materials for the deal "contained incomplete information." The company also had to admit that "it was a mistake" for the materials to fail to disclose that the interests of one party who helped shape the deal were adverse to the investors.
It also had to sign a consent agreement not to withhold material facts from investors in the future, and to reform how it reviews and approves offerings of mortgage securities.
Significantly, Goldman lost its bid for a global settlement of all civil and criminal investigations. The settlement states that it "resolves only the claims asserted against Defendant in this civil proceeding."
So, who really got the best of the SEC-Goldman deal?
Immediately after the settlement was announced, Goldman's shares jumped 5 percent higher. That tells you who Wall Street thinks came out on top -- the bankers.
And a couple foreign banks also had to be pleased with the outcome.
The settlement requires that part of the penalty be used to repay $150 million to Deutsche Industriebank AG, based in Dusseldorf, Germany; and $100 million to the Royal Bank of Scotland N.V., in Edinburgh, Scotland. The two banks had lost those amounts as investors in the subprime deal.
The other $300 million in penalties goes to the U.S. Treasury which may or may not use it to reimburse harmed investors, according to the settlement.
Khuzami called the Goldman settlement a "stark lesson" for Wall Street.
But maybe it is an even starker lesson for the individual investing public, who lost some $750 million in the subprime deal and may or may not get a dime back from the government.