Goldman Sachs

For all its posturing on Thursday, it looks like the Securities and Exchange Commission blinked. Three months ago, it briefly made Goldman Sachs more unpopular than BP. Its suit against the bank alleged fraud in a complex transaction in which Goldman sold a synthetic collateralised debt security to investors without revealing that the underlying mortgage-backed bonds had been selected in large part by the renowned hedge fund manager John Paulson, who wanted to sell the whole thing short.

This case started, on a political line vote by the SEC’s commissioners, when the financial regulation bill was in trouble. It ended within hours of the bill finally becoming a reality. The SEC never tried to prove in court of law that the practices in the suit were indeed illegal. Instead, it let the bank escape in return merely for an admission that its actions were “regrettable” and “mistaken”, and for a fine of $550m.

It is hard not to be cynical – $550m is equivalent to 1.2 per cent of Goldman’s 2009 revenues. That’s three days’ worth, or 3.4 per cent of its compensation bill. Goldman could avoid any dent to its profits by bringing its compensation ratio down from 35.8 to 34.6 per cent or by slashing what it pays in professional fees, which came to $678m last year. This penalty is symbolic, and it chiefly appears to symbolise the weakness of the SEC’s legal case. As with the financial regulation bill itself, the financial services sector was braced for something truly painful, and should now feel mightily relieved.

That said, the SEC will try to make examples of other banks. After all, it must justify all the hiring for its new structured and new products unit. Banks are still risky. But nobody else will suffer Goldman-style vilification. Investors know that the downside is limited.

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