NEW YORK (
have seen their shares take the biggest beating since the
Securities and Exchange Commission
unveiled fraud charges against Goldman on Friday, but it's hard to believe these firms will suffer that much more than competitors.
On Friday, the SEC filed civil fraud charges against Goldman and Fabrice Tourre, a vice president at the company, arguing the firm and Tourre did not disclose enough information about complex mortgage securities they created and sold. The regulator alleges Goldman had a duty to disclose to its investors that
, a hedge fund that planned to short the securities issue (a collateralized debt obligation which went by the name Abacus-2007 ACI) played an important role in selecting the mortgages that would go into it.
confirmed investor fears that the SEC is widening its focus to include other investment banks. The paper reported that Deutsche Bank,
and Merrill Lynch, now part of
Bank of America
, are being investigated for putting together deals similar to Abacus.
Since the SEC announced the charges, Goldman's stock has fallen more than 13%. Stocks of other investment banks are also down, though Deutsche Bank has been hit the hardest after Goldman. Its shares dropped 9.2% on Friday and were slightly lower Monday morning.
Gauging the damage a regulatory crackdown will do to any company is always an inexact science. Goldman and Deutsche Bank do appear to have been out in front on this particular trade, which involved creating tools that allowed sophisticated investors to express their bearish view of the U.S. mortgage market in 2006-2007. Both firms, for example, play the most prominent role in various accounts of the trade, including Michael Lewis's book, "The Big Short: Inside the Doomsday Machine."
However, punishments meted out by securities regulators against big Wall Street firms have a long history of having little impact on the bottom lines of the companies involved. Even when U.S. District Court judge Jed Rakoff threw out a proposed $33 million settlement between Bank of America and the SEC, the eventual $150 million settlement was still peanuts as far as the giant bank is concerned.
Some may argue that damage to Goldman's reputation means far more than any financial penalty, but that view would only have some merit if other firms could claim to be any more honorable. Instead, most clients are likely to assume firms not involved or less involved in these trades were simply not as smart as Goldman and Deutsche.
Still, some would say Goldman is a special case. Though the public may view things differently, Goldman's clients are sophisticated institutional investors, not regular Joes. Among the institutions, Goldman has a reputation on Wall Street for being "long term greedy," and these charges might jeopardize that view, some would say. But what about Deutsche Bank? While it isn't viewed as especially crooked, neither does it have Goldman's cache. Nonetheless, its shares are down nearly as much as those of Goldman, and it hasn't even been charged with anything yet.
The largest threat, more than reputational damage or any financial penalties to be levied by the SEC, is that of more regulation. But that would be a reason to sell shares of all the investment banks in more or less equal measure. In other words, if Goldman and Deutsche Bank deserve the punishment they are getting from the stock market, then their rivals, which haven't sold off nearly as much, look a bit expensive at the moment.
Written by Dan Freed in New York