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  • Writer's pictureJeff Matthews

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.

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