Friday, July 16, 2010

14 Days of Profit


Yet Goldman walked away with several victories that raise questions about the strength of the SEC's case. The company wasn't forced to sacrifice any top executives, including Chief Executive Lloyd C. Blankfein, as some executives had feared. The changes it agreed to won't weaken its profits or standing as Wall Street's mightiest firm. The record-setting penalty is equivalent to just 14 days of profits at Goldman in the first quarter...

Analysts had expected Goldman to pay at least $1 billion as part of the deal.

—The Wall Street Journal


We were right. Barry was wrong.

Barry, of course, is Barry Ritholtz, a friend of these pages whose fiery mix of intelligent economic commentary and populist outrage at chicanery both on Wall Street and Washington is chronicled in The Big Picture.

And Barry was convinced the SEC’s case against Goldman was so air-tight the firm would have to “settle or lose in court.”

As detailed in “From BACCUS to ABACUS: Exhibit A in Defense of Goldman Sachs” (April 19, 2010), we here at NotMakingThisUp weren’t convinced Goldman would lose anything but a few bucks.

Settle Goldman did: lose in court they did not. And what Goldman settled for, as the Wall Street Journal notes, was a mere 14 days’ worth of profits.

What Goldman admitted to was nothing—not a thing except 'incomplete information.'

Now, Barry, in taking a victory lap on The Big Picture this morning, maintains that “GS conceded misleading disclosures,” but in fact Goldman conceded no such thing.

Here’s how it’s worded in the actual consent filed by Goldman Sachs:

Goldman acknowledges that the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was “selected by” ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson’s economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.

And that’s it. Goldman admitted to a 'mistake,' not a crime.

Now, Barry calls this “misleading,” and that’s his prerogative.

But the proof of the strength or weakness in the SEC’s case lies, we think, in what Goldman gave up to settle. And, money aside, Goldman didn’t give up much at all.

Here’s an incomplete list of the non-monetary terms Goldman agreed to in the consent:

Goldman agrees it will not seek reimbursement for the fine from insurance policies;

Goldman agrees to “expand the role of its Firmwide Capital Committee”;

Goldman will have its legal department review “all marketing materials…used in connection with mortgage securities offerings”;

Goldman will have mortgage employees “participate in a training program” covering “among other matters, disclosure requirements”;

Goldman will “provide for appropriate record keeping to track compliance with these requirements”;

Goldman will wave “any claim of Double Jeopardy based upon the settlement of this proceeding”...

And other such stuff which, all in all, doesn’t do much to the financial machine known as Goldman Sachs.

So for all the arm-waving, at a price of 14 days’ worth of profits and some extra admin costs, Goldman Sachs, we think, once again, comes out on top.



Jeff Matthews
I Am Not Making This Up


© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

26 comments:

Dow Quote said...

And once again Goldman is golden.

Ritholtz said...

"Oops, you caught us, we committed fraud, hahah Sorry -- our bad"

No, that was never going to happen.

But what you got was as close to admission of lawbreaking as you are ever going to get from a (poorly) over-lawyered firm like Goldie as you are ever going to see.

Matthew said...

This is a very odd post. If you want to claim Goldman got off lightly, OK. I'm not sure that is true, but it is a defensible position. But Ritholtz said they would settle or lose, and they settled. So claiming he was wrong seems kind of a stretch.

John said...

So we have health care reforms, financial industries reforms and the Goldman settlement. It all looks like feel good politics to me. And it looks like those people of power and authority are becoming dependent on bubbles. Perhaps the entire system had become dependent on bubbles.

Edgecliff said...

Good thing i read both of you guys on a regular basis. Because I think everyone knew this was going to be a wash when it was first brought up. At least that's the sense I got out of you all's commentaries.

Jeff Matthews said...

John is correct: Barry said Goldman would either settle or lose in court, and they settled.

But those are two of the only three outcomes possible, and nobody in the world--even those of us who felt the SEC's case was weak, unlike Barry who said it was 'air-tight'--thought Goldman would take it to court, let alone win in court.

Barry's take on the Goldman suit was that the SEC had discovered fraud on Goldman's part; the SEC was going hammer-and-tongs at Goldman; and Goldman was in big trouble.

None of those things happened. Goldman admitted to "a mistake" and cut a fine deal with the SEC.

So, yes, technically Barry was right on the outcome (a settlement), but he was wrong on the implications and what it meant to Goldman. At the end of the day, it means 14 days worth of profit and not much else.

JM

John said...

You can end up in the slammer for 30, 60 days for rather minor offensives.....The system gives you a record. Does anyone get a record for this ? Does anyone even lose a drivers license for 60 days ? Anything ? Was anyone required to perform community service ? Something like clean up a park or highway ?

Bluewingcap said...

As Barry points out, the largest financial settlement ever was paid for what you term "admission of a simple mistake". $550 Million is a big fine, even if it is small change to a money machine like Goldman. Plenty of external forces came to bear on the size/speed of the settlement that have nothing to do with the strength of the case.

I'm going with Barry's take on this one. A major black eye for the firm and the Street, and a boost for the civil actions to follow.

Ritholtz said...

I keep reading these weird statements -- Its "only 14 days of profits" -- or its only 7X the CEOs salary -- or its less than 5% of Cash on hand.

Does anyone here want to change the law so that fines and penalties are dependent upon your assets or income -- and not on the actual infraction? Because that is precisely what you are suggesting.

Imagine getting pulled over for a speeding ticket, and in addition to license and insurance and registraton, you also give the cop (or the jufdge) your 1040, IRA and 401k. Based on your income and wealth, a fine is assessed -- rather than the actual seriousness of the infraction.

Because I keep hearing people make just that claim -- that apparently, we should use the company's finances and income to assess the penalty. I was under the impression that the penalty was supposed to be relative to the transgression, not your bank account.

Jeff, based on this post, are you arguing that the fine should have been a much greater fine -- regardless of the transgression -- because GS is so profitable and has so much cash? I

Is that the road any of you seriously want to go down?

Aaron said...

Professor Jeff:

Respectfully, I disagree with your assessment on the implications of Goldman's settlement with the SEC.

While GS did not admit to any wrongdoing in its settlement with the SEC, the SEC made GS agree to submit future marketing materials of mortgage securities thru its legal department for vetting of "mistakes" and "incomplete information" as GS admitted to at settlement.

This change alters securities marketing practices not just for Goldman Sachs but potentially for other firms such as Morgan Stanley and Bank of America, who market similar mortgage securities. The agreement, in my opinion, should have broad implications for GS and the securities industry as a whole.

Yes, the amount paid by GS may be small in reference to their profit, but again, as Mr. Ritholtz and other bloggers of similar opinion have argued, the settlement acts as a threat to the reputation of GS which is one of the keys to their future profit-making ability.

I could be wrong, in my opinion, however.

Also, to my knowledge, this issue is no means over, as a criminal investigation against GS by the U.S. Justice Department is still pending. Hopefully, investors will soon discover whether Goldman's alleged "mistake" on ABACUS was a material omission made with the intent to defraud its investors.

You have to admit Jeff that the actions by both Mary Shapiro and Robert Khuzami at the SEC against GS is a significant "turning of the page" in the SEC's recent failures in protecing investors which in my mind bodes well for the agency's future enforcement actions.

Anonymous said...

Settlement of this case does not necessarily mean the SEC's case was weak. It is as likely that settlement reflects the fact that the SEC itself is weak.

And by this, I mean the SEC may have settled because it is incompetent, lazy, corrupt, or a combination of all three.

Here is a question for you, Jeff. Do you have confidence in the SEC's ability to properly police and prosecute fraud on Wall Street?

Anonymous said...

How about the inevitable investor lawsuits that will follow this deal? I see two possible outcomes:

1. GS bears statutory liability for misleading its investors

or

2. GS bears common law liability for negligence in operating its funds

Either way, GS is nowhere near to being off the hook. The investors who lost money now have a golden road to sue GS, and it's going to be a death by a thousand cuts PR-wise for Goldman unless they pony up a massive amount for a universal settlement.

John said...

I was making a delivery for the company i work for. I was speeding. I got the ticket and the points on my license, not the company i work for . I paid the fine. Goldman walked and if anyone was punished it was the rank and file stockholders . The smoothies and thier lawyers are just waiting for this to blow over and the lawmakers are waiting for the big contributions ..And its my understanding when punishment is handed down the judge allows the defendents to offer extenuating circumstances with the hopes for leniency...I would bet many people have said " Judge, i'm broke or judge, i am out of work " ...I think i might have ...Maybe i'm wierd

Apples vs. Oranges said...

GS stock outperformed

vs. MS , JPM , BAC , WFC , C

over that same period

Anonymous said...

Being angry is part and parcel of Barry's act

Tin Foil Hat conspiracy theorists see danger in their cereal

CurmudgeonlyTroll said...

I score it Goldman 0, SEC 0, SEC wins on PKs LOL.

It's $1 a share. That's a material number, despite outsize recent profits and balance sheet. There's admission of insufficient disclosure and an agreement to disclose in the future.

If it were $1b and $2 a share, and weaknesses in the case pointed out here earlier were not true, ie that ACA and buyers like IKB were derelict in their duties at best, then it would be a more clearcut win, but this is certainly not Goldman 1, SEC 0, as - ahem- certain people suggested.

Jeff Matthews said...

No, it isn't Goldman 1, SEC 0, as Curmudgeonly Troll points out.

But it wasn't nearly so awful as appeared when the complaint was filed. And the fact is, whereas the initial doomsayers (Barry included) focused on the SEC's allegation of fraud as if it was a proven fact, Goldman only admitted to a "mistake."

As for Barry's (and others) point that Goldman's fine was a whopper, well, yes, it was...but again, the SEC indeed settled without getting Goldman to admit to the supposed fraud spelled out in vivid language by the SEC when the complaint was filed.

And our original point was that the SEC's complaint didn't demonstrate fraud.

As for whether this high-profile action by the SEC shows a new, welcome face at a moribund agency...well, yes. It's good to see them go after some big boys--year too late though it happened to be. What Goldman did was repugnant and worth bringing to light.

As we pointed out in the original piece back in April, however, what Goldman did was a sign of the times and not some underhanded criminal scheme, in my view.

Willing, smart sellers met willing, dumb buyers.

JM

Jeff Matthews said...

P.S. We had a comment in support of Barry's take that was accidentally deleted in the course of filtering spam comments (Google has slipped up in its ability to keep spammers from attempting to post comments here).

If the author of the comment would like to re-post, please do and we'll make sure it shows up. It was entirely untentional.

JM

Anonymous said...

I had not read Barry Ritholtz' blog prior to analyzing this SEC case against GS and was unaware of the different points of view which you and he had relative to its impact on the bank.

Having now reviewed his blog and his responses to your blog on the subject, here is my assessment, fwiw.

While Barry may have been right and you may have been wrong about certain aspects of the case, he was wrong about its overall impact to GS and you were right. This is particularly ironic when you consider that Barry's blog is entitled, "The Big Picture."

Barry contends that the case was strong and you contend that the case was weak. I think Barry was probably right about this. But Barry's original post leaves the impression that the case against GS is just the beginning and that there will be more cases to follow, not just against GS, but against several other banks. He says the following:

"I suspect this is a tip of the iceberg, with lots more problematic synthetics behind it. And not just at GS. I suspect the kids over at Deutsche bank, Merrill and Morgan are working furiously to review their various CDOs deals."

What Barry fails to acknowledge is that the SEC only files a suit when it is confident it can win. So, while the case filed against GS relative to ABACUS 2007-AC1 may have been strong, I am caused to doubt whether they have much more against the bank. And by settling this case, GS may have halted any "fishing expedition" the SEC might have embarked on to uncover still other frauds.

Otherwise, Barry comes across as a rather arrogant lawyer with his assertion that non-lawyers should not be "ignorantly commenting on securities litigation." Here too, maybe Barry ought to reflect more on "the big picture." Does he really believe financial reporters and analysts who are not lawyers do not have sufficient knowledge of the Securities Acts to form an opinion about an SEC matter? Otherwise, I thought the First Amendment of that "big picture" document we call the Constitution guarantees freedom of speech and the press. Or don't they teach this to first year law school students where he earned his JD?

But, getting back to my main point again, I have this question for Barry. Barry, since you are such a smart lawyer (and one who boasts in his blog of his contacts with the SEC), is this really just the "tip of the iceberg," as you put it? Is the SEC itching to file still more cases against GS and other banks? And what exposure do they have? Give us a ballpark number if you will. After all, we want "the big picture" so we can assess the true value of GS stock.

Or perhaps we should we just accept Barry's back-peddling claims of vindication with analogies to exorbitant fines for traffic infractions?

Tell us Barry. Is this the really just the "tip of the iceberg?"

We're all ears.

Sign me, "A lawyer and a friend of Jeff."

Anonymous said...

If, as you said in April, "the government doesn’t have a leg to stand on", why did Goldman settle? Its pretty clear who was right and who was wrong in his analysis on this case. Ritholz deserves his victory lap, if only because so many others were so spectacularly wrong.

John said...

Jeff started his blog like this " We were right, Barry was wrong " I say its all to early to tell.... maybe i'm nuts but i am starting to wonder if we require a bubble inorder to be happy ...That out pols want bubbles so they might stay in power. .....Goldman won or lost ? Clearly they are two-faced ( Read Rich Sauer's book ) ...I wonder if the question should be , do YOU beleive them ?

Colin P said...

You guys should go on CNBC and debate this. It would be the most interesting segment since I tried to stop watching CNBC in 2009.

I have seen Barry on CNBC many times, but never you, Jeff. Is there a reason?

Jeff Matthews said...

Colin has a great idea--cage match on CNBC--except that, having a day job as I do, I only seem to get on CNBC when wise-guy CEOs try to blame shortsellers for their problems.

JM

Jonathan said...

It makes me sick how Goldman Scum basically got a slap on the wrist. They've been through the "worst" and now with finance reform, they're set to hit big.

Doesn't anyone see anything wrong with four banks controlling 60% of the money?

"I feel like I'm taking crazy pills!"

Quick question: why didn't they just settle before?

John said...

"lights , camera, action !" ....Just forget it. Written word and reply gives people time to think, time to "sleep on it" . TV does not and that does a disservice to the participants and audience . Give me a good article or blog like this one, like Ritholtz's any day.. I for one think TV hurt Jim Cramer. Lets see if Herb loses his bite .

John said...

I wonder, is this proof our coutry requires a bubble ?

http://finance.yahoo.com/news/GM-to-pay-35B-for-auto-apf-507453632.html?x=0&sec=topStories&pos=4&asset=&ccode=

Did Goldman advise on this deal ?