ECONOMY -- July 15, 2010 at 5:30 PM EDT
Goldman Sachs, SEC Reach $550 Million Settlement
The Securities and Exchange Commission has reached a $550 million settlement with Goldman Sachs in its case accusing the company of misleading investors in mortgage-backed securities, the agency said in a statement.
"This record-setting settlement reflects the egregiousness of Goldman's conduct and should serve as a powerful deterrent [to other companies]," Lorin Reisner, deputy director of the SEC Enforcement Division, told reporters in a press conference.
Of the settlement, $300 million will be paid to the U.S. Treasury, while $250 million will go to investors who lost money.
The SEC and Goldman Sachs have been in talks since April, when the agency accused the firm of failing to disclose conflicts of interest related to one of its products, the Abacus 2007-AC1 mortgage investment. The Rundown explained the case in April:
The Securities and Exchange Commission alleges that Goldman Sachs created a mortgage investment, called the Abacus 2007-AC-1, in February 2007 that contained mortgage bonds selected by a Goldman client, John Paulson, a top hedge fund manager. (Paulson is not named in the suit.) According to the civil charges, Paulson selected the bonds believing they would lose value if the housing market collapsed. By betting against them, he stood to gain rich rewards. Indeed, he is believed to have made several billion dollars betting against against the housing bubble in 2007.
The conflict of interest the SEC alleges stems from the fact that Goldman marketed and sold Abacus to its other clients as a good investment without revealing that its contents were handpicked by a client who believed those bonds would fail.
In Thursday's settlement, Goldman Sachs did not admit all of the wrongdoing alleged by the SEC, but did acknowledge that the marketing materials for Abacus 2007-AC1 contained "incomplete information."
The company said in the settlement papers: "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."
In addition to paying the $550 million restitution, as part of the settlement the firm agreed to change the way it writes its marketing materials and to add additional training for employees in the area.
NewsHour economics correspondent Paul Solman sent in a few quick reactions to the news:
1) The fiscal 2010 federal deficit is currently projected at roughly $1.2 trillion. Goldman's $300 million will lower it by only about 1/25th of one percent.
2) The UK treasury took in twice the amount -- $600 million -- by imposing a bonus tax.
3) The $550 million total represents 4 percent of Goldman's record $13.4 billion in profits last year, though the firm is expected to post lower earnings in 2010, "following turbulent markets and" -- you've got to love this phrase from the Wall St. Journal -- "desiccated business demand." The story continued: "Not only was the trading environment rough for Goldman...but debt and equity underwriting activity also grew cold." (That's the dessicated demand, one assumes.)
4) The $550 million is also a very evocative number for someone who's been reporting on Wall Street for long enough. It's the amount junk bond king Michael Milken famously earned from his investment banking firm Drexel Burnham in 1987. Milken paid a $600 million settlement fee in 1990 and did prison time as well. Drexel had been forced to pay a $650 million fine the year before, which put it out of business.