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SEC v. Goldman Sachs: What's the End Game?

By Adam Levitin

So far no one seems to be talking about the end-game of the SEC suit against Goldman Sachs over the Abacus CDO.  What is the SEC really looking to do here?  Regardless of whether this case goes to trial or settles (and I'd bet on the latter), what does the SEC want from Goldman? 

This can't just be about a monetary penalty.  Any monetary penalty comes at the expense of Goldman's investors, not the managers at the time (the Rakoff problem), and if the monetary penalty is large enough to really make Goldman hurt, it will threaten the firm's viability.  I don't think the SEC is looking to do that. 

Maybe it's as simple as the SEC wanting to make Goldman say "uncle," to reestablish its reputation as the tough cop on the Street.  Clearly the SEC needs to put up a good fight to restore the luster of the agency after Madoff.  That probably requires a win, but just trotting out the colors does a lot to restore the agency's reputation, and what better foe to challenge than Goldman if the SEC wants to show its mettle?   Regardless of the merits of the case (remember that the SEC, with limited resources, doesn't pursue every possible case), this could be "who's your daddy" litigation. 

Alternatively (or additionally), maybe the SEC's ultimate goal is some type of injunctive relief.  There's always the permanent injunction against doing anything bad again, but that's really not such a heavy duty penalty.  Let me suggest another possible route of action:  the SEC uses a settlement to implement something like the Volcker rule.  The SEC could demand that part of a settlement be that Goldman separate its proprietary trading and its underwriting operations. 

I don't think that's a likely scenario, but it's not as farfetched as it might sound.  Recall that the SEC (and FDIC) is running well ahead of Congress in terms of financial reform, with proposed regulations on asset-backed securities and disclosures from large traders.  The real financial reform might come out of the agencies, rather than Congress.  But there's no reason it has to happen solely through regulation.  The history of the SEC shows that the agency knows how to advance a regulatory agenda through both regulations and through carefully chosen litigation (e.g., the history of the Public Utility Holding Company Act, which the SEC litigated very carefully to avoid courts hostile to the legislation). 

Full post as published by Credit Slips on April 16, 2010 (boomark / email).