Bailout

Fraud settlement datapoints of the day

By Felix Salmon

Announcing the SEC settlement with Goldman Sachs yesterday, Robert Khuzami started waxing hyperbolic:

“Half a billion dollars is the largest penalty ever assessed against a financial services firm in the history of the SEC,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

This really isn’t true. For one thing, as Dan Gross points out, Mike Milken paid more money, in inflation-adjusted terms, back in 1990. But you don’t need to go back that far: AIG paid the SEC $800 million as part of a $1.6 billion settlement in 2006. I think it’s reasonable to consider AIG a financial-services firm, no?

And that wasn’t the end of big settlements for AIG: today, it agreed to cough up another $725 million to settle a long-running class-action fraud case brought by Ohio’s attorney general. The class, incidentally, is shareholders of AIG back in Hank Greenberg days, so essentially today’s shareholders (that’s the U.S. Treasury, in case you forgot) are paying the best part of a billion dollars to yesterday’s shareholders. The total settlement is $1.0095 billion, and includes $115 million from former AIG executives including Greenberg himself.

It seems to me that the SEC could at the very least have extracted more money from Goldman than it did from AIG in 2006, putting Goldman on top of the list of the biggest SEC settlements ever. (At the moment it’s third, behind AIG and the $750 million WorldCom settlement in 2003.) But Chris Whalen says that the real damage is yet to come:

I suspect that the board of GS will continue to support Blankfein in public and will allow him to oversee the remainder of the cleanup effort. But after a decent interval has passed, I expect that Blankfein and other key members of the management team will step down.

In other words, Blankfein’s position is looking a little like that of Tony Hayward at BP: he’ll continue to lead the company so long as it is the subject of broad-based public opprobrium, but once things start recovering, fresh blood will be brought in to represent a New Era. Goldman has a deep bench of executives capable of being an effective CEO; it doesn’t need Blankfein. The only question is where he might go, since the door to government seems closed at the moment. Maybe he’ll take a leaf out of Milken’s book, and try to rehabilitate himself through a high-profile charitable foundation.

Full post as published by Macroprudential on July 16, 2010 (boomark / email).