Opinion

Felix Salmon

Fraud settlement datapoints of the day

By Felix Salmon
July 16, 2010

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.

Comments
2 comments so far | RSS Comments RSS

My understanding is that the GS settlement is for that series of securities only. The other settlements were for company-wide or a broad series of securities violations.

I don’t believe that the SEC is precluded in any way from following other smoking guns if there are any.

The biggest issue is that it is legal to do nearly anything on Wall Street, including unethical and immoral practices. It truly is “buyer beware” but they have very good salesmen who can make their customers believe that they really are looking out for their best interests.

Posted by ErnieD | Report as abusive
 

Yeah, Ernie, I read somewhere that RBS is thinking about suing GS over this and my reading of the settlement is that the 100million doesn’t go towards any other settlement, ie if RBS sues and wins 891million then they get 891million not 791million with the 100million already paid taken into consideration.

Posted by Danny_Black | Report as abusive
 

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