Jonathan Weil: Goldman agrees to pay up

Opinion

At least for one day, after years of milquetoast responses to financial depredations, the Securities and Exchange Commission finally can boast that it's doing God's work again.

Goldman Sachs has agreed to pay US$550 million ($762 million) to settle civil fraud charges that the Wall St giant misled buyers of mortgage-related investments.

The settlement was announced by the commission yesterday. The deal calls for Goldman to pay the SEC fines of US$300 million. The rest of the money will go to compensate those who lost money on their investments.

Here's the real beauty of the SEC's settlement agreement.

The next time Goldman chief executive Lloyd Blankfein goes on television and is asked by some reporter if Goldman committed securities fraud, as the SEC alleged, he won't be allowed to say no.

He won't be able to repeat any of the factually improbable denials Goldman issued just three months ago after the SEC sued it for ripping off a hapless German bank named IKB as part of a bond deal called Abacus 2007-AC1.

He'll just have to suck it up and take the hit. It's "the right outcome for our firm, our shareholders and our clients", as Goldman said in a press release after the settlement was disclosed.

More incredibly, the SEC even got Goldman to admit it made "a mistake", which might be the strangest thing ever to happen on Wall St.

Next thing you know, Blankfein will grow wings for his trip to the heavens, and Goldman will surrender its charter as a bank-holding company to become a nonprofit centre for religious studies.

So here's where the case stands now. The SEC's April 16 complaint accused Goldman of committing securities fraud with scienter, meaning with intent or knowledge of wrongdoing.

Had it been so inclined, the SEC could have filed an amended complaint accusing Goldman of a less serious offence instead, rather than fraud, as part of its settlement with the bank. The commission didn't do that, though.

While Goldman isn't admitting the SEC's fraud allegations, it isn't denying them either, because it's prohibited from doing so under the settlement terms.

What a difference a few months makes. Back on April 16, after the SEC filed its suit, Goldman issued a press release wailing that "the SEC's charges are completely unfounded in law and fact, and we will vigorously contest them and defend the firm and its reputation".

Looking back, it seems Goldman made a typographical error by omitting a few words at the end of that sentence: "until July 15".

For those who have forgotten the details, the SEC's lawsuit accused Goldman and a vice-president, Fabrice Tourre, of making false and misleading statements to investors about a synthetic collateralised debt obligation that was designed to fail.

The SEC said the firm's main offence was telling IKB that a company called ACA Management had selected the portfolio of mortgage-related investments underlying the deal, when actually the selection process was heavily influenced by Paulson & Co, a hedge fund that later made US$1 billion shorting Abacus.

Back in April, Goldman insisted that ACA "selected the portfolio", just as its sales materials said.

Now, as part of the settlement, Goldman has admitted "it was a mistake for the Goldman marketing materials" to omit "the role of Paulson & Co in the portfolio selection process and that Paulson's economic interests were adverse" to the bond's investors. The consent decree added: "Goldman regrets that the marketing materials did not contain that disclosure."

So all that stuff Goldman told the public in its defence a few months ago was just PR bluster. As for Tourre, who has denied the SEC's allegations, he still hasn't settled, and now Goldman has agreed to co-operate with the SEC in its case against him. We can only hope all this will prove to be a humbling experience for Goldman.

- BLOOMBERG, AP

* Jonathan Weil is a Bloomberg News columnist.