Does Goldman Get Slapped Harder?

Tracy Corrigan Daily Telegraph September 10, 2010

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By Tracy Corrigan Business Last updated: September 9th, 2010

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The latest regulatory wrist slap for Goldman Sachs, a £17.5m fine from the Financial Services Authority, may not cause much financial hardship – it is dwarfed not only by Lloyd Blankfein’s pre-crisis pay packet but by its $550m (£355m) settlement with the Securities and Exchange Commission of fraud allegations.

But in comparison with punishments meted out to other miscreants, it seems positively draconian. First of all, what is the offence? Goldman failed to notify the FSA that it was being investigated by the FSA for the misselling of a structured investment called Abacus. The London arm of Goldman then registered Fabrice Tourre with the FSA without disclosing that he was a target of the investigation.

This is what Margaret Cole, the FSA’s head of enforcement, said about it:

GSI did not set out to hide anything, but its defective systems and controls meant that the level and quality of its communications with the FSA fell far below what we expect of an authorised firm. The fact that senior business people at GSI in London knew about Mr Tourre's Wells Notice, but did not consider the obvious regulatory implications for GSI is very disappointing. Had GSI complied with its UK obligations, the outcome for it would have been very different.

This penalty should send a message "“ particularly to the senior management of large institutions "“ of the need to have their firm's UK reporting obligations at the forefront of their minds.

There is no doubt that it’s a rather big oversight, all the more embarrassing because if it can’t manage this sort of low grade compliance, it makes Goldman’s perpetual boasting about its superior risk management skills sound a little hollow.

But look at some of the other big fines meted out by the FSA. Last year, JP Morgan was fined £33m for failing to separate its own money from its clients’. That is the biggest ever fine. Goldman’s £17.5m is next, just ahead of Shell’s £17m fine for mistating its reserves. In other words, JP Morgan wasn’t looking after its clients money properly and Shell misled the market; Goldman didn’t fill in the right forms.

The broader inquiry related to Fabrice Tourre, involving the misselling of financial products, was a very serious matter and no less a figure than Gordon Brown expressed his concern. Goldman has repeatedly been accused by its critics of favouring some clients – including internal ones – over others, and this case was an attempt to pin that charge down through a specific transaction. But Goldman settled with the SEC and the FSA is not pursuing this issue, so it would be a bit rough for the FSA to then say, well, we’re going to whack you extra hard, because we reckon there was something fishy going on, even though we can’t quite get to the bottom of it.

That is not what the FSA is saying, you understand; it just seems that way. The FSA’s position, rather, is that Goldman is a big, sophisticated firm, it should know better, and the fine is designed to send “a message” to other firms that such slips will not be tolerated.

So maybe it is just a coincidence that the moment the FSA has picked to get tough on this sort of foul-up just happens to be when Goldman is in the frame.

How embarrassing is the latest regulatory assault for Goldman? Although the FSA complains of senior London bankers failing to flag up the inquiry, people at Goldman say that it was the job of the US compliance arm to passed on the information to UK compliance colleagues. It does seem pretty astonishing that they didn’t. But like the fine, this is a minor matter in the greater scheme of things. More important is the fact that the bigger Abacus issue seems to be fading. In that context, Goldman’s harsh slap may sting, but the pain is unlikely to linger.

Tags: abacus, Fabrice Tourre, financial services authority, FSA, Goldman Sachs, Lloyd Blankfein, SEC, Securities and Exchange Commission

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