Goldman's Settlement with the SEC, and the Fragile Future of the Fabulous Fab

Even in the depths of summer, the settlement agreed last month by Goldman Sachs to resolve the charges of the US Securities and Exchange Commission relating to “Abacus,” the toxic subprime mortgage-based derivative, attracted howls of antagonism.  

A reader here called it “total joke” and “a blatant PR splash by the SEC.” Among the bloggers, plaintiffs’ lawyer Jake Zamansky addressed his constituency in high dudgeon, about “letting Goldman off the hook” for “a measly $ 550 million without admitting any wrongdoing”(here). Andrew Ross Sorkin in the New York Times focused on Citigroup’s own $ 75 million SEC settlement (here), but included Goldman’s deal in pointing out that corporate fines come ultimately out of the pockets of shareholders of the offender, not the responsible senior executives.

There’s certainly no need to plead for Goldman. It deftly submitted to an early-stage punishment it could readily afford to bear, from a government agency apparently lacking the stomach for a protracted battle and therefore signaling significant anxiety about its case on the merits.

There are limited options for punishing a corporation – money fines, behavioral monitoring, or the ultimate loss of its right to exist. As only the abstract, legislatively chartered sum of its corporeal parts – directors, managers, employees, shareholders and customers – a corporation is an existential construct that cannot be imprisoned, flogged or otherwise subjected to more personal sanctions.

So for starters, no responsible authority has suggested that the financial sector either in the US or globally would be better off if Goldman had been punished to the point of extinction.

Instead, times have changed. Arthur Andersen disintegrated in 2002 under the Justice Department’s Enron-related indictment – the avoidable and unnecessary result of a series of tragic-comic tactical blunders on both sides. Since then, federal prosecutors in America have treated the financial services sector with the delicacy of Oscar Wilde’s maxim that “a gentleman never hurts anyone’s feelings – unintentionally.”

Consider by contrast the future fate of Fabrice Tourre – the Goldman wheelman on the Abacus deal, who having missed the settlement bus, is now left for road kill.

Did he seek to participate along with the company’s settlement, only to be left as the sole remaining defendant? My calls to his lawyer elicited no response. And the SEC itself never comments on pending litigation. But as reported on August 9, the SEC staff did disclose to the federal court in New York that “very preliminary” settlement talks with Tourre had occurred (here).

It would be inverted logic for the agency to claim a notch on its battle-axe for the $550 million result against the company, yet to view Tourre as such a significant player that it would refuse to negotiate with him. He is simply too small a minnow in the Goldman pool, compared to the big fish the SEC did not even charge, starting with chief executive Lloyd Blankfein and president Gary Cohen.

On the other hand, if Tourre was at the settlement party but could not find the exit under virtually any penalty that left him at liberty, either he or his counsel deserves a whack. Tourre faces a long haul of pre-trial depositions and document production, costly in both funds and emotion. Even with Goldman footing the financial bill, the grind on an individual opposing the forces of government is eventually crushing to the spirit.

Callow and over-stated enthusiasm for his defense position would be no great surprise, but a defendant’s stubborn pride that he was an innocent under venal superiors is a commodity whose value depreciates with the extended duration of a prosecution.

That is, Tourre is a dead man in the industry no matter what. There is now a record against him that includes Goldman’s concession of “mistakes” – although not liability or culpability. Tourre will therefore lose his motions for early extinction of the charges.

So any later settlement window will only open just before a trial, when the SEC will have its engines humming and when an outcome must be worse than anything Tourre could have negotiated at an earlier stage.

Outsiders’ criticisms should only be offered with great care. But it says here that Tourre’s spanking by the SEC is inevitable – so the sooner he bends over, the better.

 

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Comments

[Jr Deputy Accountant]

Tourre was not the bad guy, I feel like he was merely trying to showboat to his girlfriend in emails to make his work sound cooler and more mysterious than it was to get a piece of tail. And then he gets strung up like the bad guy as the target of the populace's misplaced Goldman rage while the GS rats go back to business as usual and find the next sucker to blame their bad behavior on. Pathetic.

I agree with you that outsiders need to bite their tongues and be sure their anger is properly placed and within reason. Of course that's a tough sell when everyone is angry about the state of things these days and most have absolutely no idea who they should be angry at so they just pick the closest and most obvious target. In this case, that's our little fresh-faced Fab. I don't feel sorry for him, surely he knew what he was doing and got off on the thrill of being a dirty Goldman rat just as critics get off on bashing him as a result.