Recruiter’s View

The Securities Exchange Commission showed Congress that it’s tough by beating a half billion dollars out of Goldman Sachs. It’s time for the SEC to show that it is also useful. The American investor still needs protecting.

Goldman Sachs and the SEC announced a settlement today. Highly educated, very disciplined attorneys on both sides wrestled to this compromise: Goldman will neither admit nor deny fraud. The SEC will fine Goldman $550 million.

That’s large in historical terms, and the SEC was proud to make that clear. But up against Goldman’s $15 billion of earnings over the last four quarters, the fine is insignificant. GS stock jumped $800 million on the announcement alone.  

What is not insignificant is the damage to the company and the ongoing threat to the industry. The value of Goldman Sachs dropped as much as $25 billion during the onslaught. That’s before legal costs, potential lost business, and the severe challenge of trying to stay focused on its business.

WAS THE SEC MERELY SAVING ITSELF?

For the SEC, the timing is interesting. The settlement comes just as Fin Reg is being passed.

To the ignorant bystander, such as myself, this settlement confirms that the SEC’s attack on Goldman was merely a show of toughness designed to impress Congress.

Sadly, this show of toughness primarily protects the interests of Deutsche Bank, a sophisticated international player that bet on U.S. real estate debt. Goldman produced someone – internally – who was willing to take the other side of that bet. Somewhere in that process, the SEC found an egregious offense. A violation that the SEC could use to rebuild its seriously damaged reputation.

Having totally botched the Bernie Madoff fraud, the SEC had become vulnerable at a very bad time. Congress was writing new financial legislation. The early drafts visibly downgraded the SEC’s stature. To reverse that, the SEC had to prove quickly that it is strong and viable.

Beating up on the most successful market maker in the world was a dramatic way to do it.

In the end, the SEC didn’t play out it’s feeble case against Goldman. And Goldman didn’t have to bet the company that it would win.

The SEC gets to keep its authority. Goldman Sachs gets to keep its license. And the rest of the industry gets to wonder who’s next.

Left unanswered is the legal question raised by the SEC filing: Since when does a market maker have to reveal who takes the other side of a deal?

WHAT’S IN THE SEC’S FUTURE?

The SEC is now at an interesting crossroads.

As it stands, the SEC gets to claim a dramatic win, based on no contest. So far, the charges have been lame, and the only thing the SEC has actually proven is that it’s tough. It can continue to press its bet, going on the attack against one bank after another. Ultimately, I suppose, it would sue Citi; whose primary stockholder is the U.S. Government. That could be interesting.

Other than the entertainment value of watching banks get looted in a spectacular way, I’m not sure how the U.S. citizen benefits from any of this. Certainly, more governmental assaults won’t free up lending.

There is another thing the SEC could consider doing.

It seems the original motivation for the SEC’s show of power was to offset its miserable performance in protecting the U.S. investor.

Yet, the U.S. investor does still need protecting. The May 6 Flash Crash proved that.

Investors have visibly removed their money from the markets.

What would happen if the SEC just went back to doing its job?