Robert Khuzami made a splash, as intended, today when he announced the biggest Wall Street penalty in the SEC’s history, a $550 million deal with Goldman Sachs (GS). We’re just not sure the long-term view will be as kind.
The blogosphere has been quick to blast the deal as too little, too soon. Goldman shares actually rose after the announcement, though it’s impossible to know whether that’s from relief over the fact of a settlement — any settlement — or giddy joy over its size.
Here at footnoted, we did what we do best: We went to the filings to find some measure of comparison. We found a few, and they aren’t pretty.
Goldman had $27 billion in cash and short-term securities on March 31, according to its latest 10-Q. That means the settlement, at barely 2% of the total, is in fact pocket change for the company. For a household with net worth of $60,000, the equivalent percentage works out to $1,219 — not trivial, but hardly a major expense.
Like many companies, one of Goldman’s most significant recurring expenses is its personnel. It accrued compensation and benefits expense of $5.49 billion in the first quarter — 10 times what it’s paying out to settle this case.
And finally, the one that puts both Wall Street pay and the penalty onto a human scale: Since the beginning of Goldman’s 2007 fiscal year, Lloyd Blankfein and four other men (the company’s other top-paid officers) have made more than $288 million among them, according to Goldman’s proxy — or about 52% of the penalty amount. In other words, those five men could probably scrape together enough to pay the fine themselves.
All told, not terribly impressive. But there’s also the SEC’s perspective. Obama asked Congress for $1.26 billion to fund the agency for fiscal 2011, an increase of about $139 million over fiscal 2010 — and just barely double what Goldman will shell out without breaking a sweat. This speaks volumes about the resources available to Wall Street’s beat cops.
So from the SEC’s perspective, Khuzami hooked a whale. From Goldman’s, it’s more like a minnow. Which view matters when it comes to deterring future bad behavior?
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Let’s compare BP to Goldman.
BP = Had a blowout, an accident, at a highly complex and risky drill site. The were drilling a deep hole at significant depth and pressure in an attempt to fulfill the world’s need for energy. Yes, they were using less than robust methods to construct the well and even skimped on safety equipment. Their safety record is pretty poor and as a direct result of what was preventable disaster, eleven people died. They were fined $20 billion over four years and continue to hold responsibility for the clean up efforts. The spill at this time is now the size of the state of New York. Total liability may be in excess of the $20 billion to be forfeited.
GS = Knowingly peddled “shitty” deals to customers. Internalized “ratings based buyers” to take advantage of this far from sophisticated investor. Constructed deals for privileged former employees that were nearly certain to fail and then failed to disclose in detail (their PB) that a synthetic had been packaged to look like a cash CDO. The purpose of these deals was not to create affordable housing or to act as a “market marker” between two sophisticated and informed parties. The total cost of this while negligible has greater implications. The housing bust has cost the United States thus far $7 Trillion. The bank bailout inclusive of FNM and FRE would add another $5 Trillion. Goldman was fined $550 mm. What?
Get off of the back of Goldman Sachs. It has become a favourite punching bag. It operates in an environment which is extremely connected and sometimes things go out of proportion due to momentum in the industry. For the fault that it committed, it has been penalized. Now let it go on with good wishes!
Well, let’s face it — the SEC had a very weak case, and GS simply settled just to get the damn thing over with. It was very close to a nuisance suit sort of settlement. (And, contra Edwin, no one knowledgeable would claim that the Abacus deal caused any of Edwin’s laundry list of woes.)
In addition, I’d point out that your analogy is incorrect. You are comparing a ratio based on cash (for GS) to a ratio based on an individual’s net worth. A better analogy would use something like GS book value, making the penalty a tiny fraction of GS book and really the lightest of slaps on the wrist.
It’s no wonder GS price is going up — it’s a great deal for GS and more proof that the SEC is way beyond its depth.
Hey numbnuts. I was not comparing based on net worth I was comparing the two based on the severity of their offenses/crimes.
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