Bankruptcy

Goldman Abacus Settlement: $550M in Hush Money

By Adam Levitin

The SEC settled with Goldman Sachs for $550M over Goldman's lack of disclosure in the Abacus 2007-AC1 CDO.  While this is a record settlement for the SEC, I think the settlement is a real disservice to the public because it means that we will never have the opportunity to really learn just what was going on in the bowels of Wall Street in the run up to the financial crisis.  The real value of the Abacus litigation was it was a chance to shine some sunlight on the inner workings of Wall Street.  The complaint and hearings gave us a taste, but if this litigation went further, we would likely have learned much, much more.  Instead, Goldman paid the SEC $550 in hush money and will succeed in keeping further details of its operations under wraps.  

The SEC's Abacus litigation seemed to hold the promise of becoming a modern Pecora commission, delving into the origins of the crisis.  Sure, we have the Financial Crisis Inquiry Commission, but the FCIC will never manage to get to the level of detail that emerges as a by-product of litigation.  For $550M, we will all continue to remain ignorant.  

For Goldman, the total amount of the settlement is frankly insignificant and unlikely to serve as a deterrent to future wrong-doing.  The real cost to Goldman is reputational, but through the settlement, Goldman can largely put the Abacus issue behind it.  Goldman's shares rallied 4% leading into the announcement (other banks rallied too, but not so much), and then fell just a hair thereafter.  In short, the market doesn't seem to think that this settlement had any punitive effect on Goldman.  

For the SEC the settlement is a real coup.  It can revel in a blockbuster settlement that shows that there's a cop back on the Street and put another moosehead up on the wall.  But does that really matter?   Would anyone really care if the settlement were for a clean $1B?  That's still chump change on the Street.   Unfortunately, though, in this case what's good for the SEC is not in the public's interest.

Full post as published by Credit Slips on July 15, 2010 (boomark / email).