Today's Outrage: SEC's Bunkum Goldman Case - TheStreet



) -- It's difficult to find sympathizers with

Goldman Sachs

(GS) - Get Report

these days, but bear with me for a moment.

The Wall Street firm reached a $550 million settlement with the

Securities and Exchange Commission

this week, a few days ahead of its earnings report on Tuesday. Goldman didn't admit to the charges filed against it, nor did it deny them. Instead, the bank said it had made a "mistake" by providing "incomplete information" to investors in a deal it structured in 2007.

Here's why Goldman settled with the SEC: To put accusations of fraud behind it and move forward. Those accusations -- though still unproven -- threatened the firm's ability to do business by spooking clients. They also helped evaporate as much as $30 billion in shareholder value over the course of a few months, with Goldman's stock plummeting as much as 17% on the day allegations hit The Street.

Goldman CEO Lloyd Blankfein has a duty to serve shareholders and the firm's reputation is its most valuable asset. Had he and the legal team not hammered out a deal to resolve the fraud charges, there may have been a drawn-out legal battle that could have led to

piggy-back lawsuits by private investors.

By the end of such an ordeal, the damage to Goldman's name may have been unsustainable, regardless of the outcome of Goldman vs. the SEC. It also may have been more costly than the $550 million settlement price tag.

As for the SEC, anyone who thinks this case is a victory is completely absurd.

Rob Khuzami, head of the SEC's enforcement division touted the settlement as "the largest penalty ever assessed against any investment bank or other Wall Street firm in the history of the SEC."

But that's really just indicative of how piddling the SEC's earlier fines have been: WorldCom, which actually was proven to have perpetrated massive accounting fraud, only had to shell out $750 million. In just the context of Goldman Sachs, the $550 million charge represents just two weeks' worth of profits, as


points out, and less than 2% of the market value which the SEC helped erase.

The regulator (and legislators) trumped up charges against Goldman by using grandiose language about the significance of the case, and trotting out profane emails sent among the firm's employees. There's no doubt that some of Goldman's tactics were unsavory and that language presumed to be private can be embarrassing when put on public display.

In the "ABACUS 2007-AC1 CDO" deal that related to the SEC charges, the sole winner appears to have been a hedge-fund manager who bet against the American dream. Goldman helped him do that, then joined the party by taking the same position.

Meanwhile, other clients lost billions of dollars and Americans lost their homes. A Goldman executive also called a different structured-product offering a "shitty deal" -- sleazy language that lawmakers nonetheless had a ball repeating over a dozen times when Goldman top-guns were called to testify before Congress.

But, importantly, none of what constituted the big Goldman sideshow was proven to be illegal.

The fact that the SEC brought civil, rather than criminal, charges against Goldman indicated that from the start. The fact that the evidence unveiled by the SEC was shoddy supports it. The fact that Goldman refused to admit wrongdoing bolsters the case that it mightn't have done anything wrong.

The fact that the government brought Goldman before the court of public opinion -- which is easily swayed against Wall Street these days -- rather than a judge, is just sad.

If one thinks Goldman's actions were illegal, that's a criticism not just of Goldman, but of the SEC for not having noticed these widespread practices at the time. If Goldman had indeed been such a crook, swindling so many investors with its unusually corrupt practices, as the SEC first indicated, why then did the SEC say it had closed other investigations into Goldman's CDO deals and doesn't foresee further charges?

If one thinks that Goldman's actions

should have been

illegal, then that's also a criticism of lawmakers for not having had adequate laws on the books. The SEC charged Goldman under Depression-era rules, a time when synthetic CDOs were not even a gleam in Wall Street's eye.

Additionally, the SEC's suggestion that taking a position in the market is illegal because it goes against other market participants indicates that the SEC doesn't understand how markets even work. Simply buying or selling a security necessitates counterparties with different views on the asset's direction.

Otherwise, if the SEC does indeed understand how markets work, then it's deceiving its own "clients" -- taxpayers -- by trumping up empty charges for political purposes and ignoring the fact that it missed actual manipulation by scores of shysters over the years, from Bernie Madoff to Enron.

"Goldman puts this problem behind them for a small amount, the SEC avoids having to work hard in fighting Goldman's lawyer

s and also gets to continue to regulate by headline and press releases, which is what it really wants," says Andrew Stoltmann, a Chicago-based attorney who works with hedge funds and other financial firms. "This is unfortunately how regulation works in the U.S."

Furthermore, the big banks on the other side of the trade knew that a hedge fund manager who was openly bearish on the housing market was involved. If one believes they were actually misled, then maybe those investors weren't so "sophisticated" after all and shouldn't have been dealing in complex securities to begin with. Or maybe -- just maybe -- they were simply on the wrong side of the trade.

In any case, the SEC accused Goldman of not serving its clients well by misleading some of them and placing two-faced bets. Had Blankfein allowed the uncertainty to continue through a drawn-out legal battle, it would have been a disservice to all Goldman's constituents -- clients, shareholders, employees and counterparties -- regardless of the outcome.

At the end of the day, the SEC cited a violation of Section 17 (a) of the Securities Act of 1933 -- which Goldman didn't admit to, and which the SEC apparently couldn't prove -- and dropped allegations of other violations. The SEC wouldn't comment on vague indications that it is investigating other firms involved in the CDO market during the subprime bubble. Don't be surprised if the supposedly wide-ranging investigation -- which helped send down shares of other big CDO players like

Bank of America

(BAC) - Get Report


JPMorgan Chase

(JPM) - Get Report



(C) - Get Report


Deutsche Bank

(DB) - Get Report



(BCS) - Get Report


Credit Suisse

(CS) - Get Report

-- quietly fades away now that the financial-reform bill has passed Congress.

The investors who lost out on the Abacus deal will get $200 million back from the settlement, which isn't bad for what in hindsight was -- to use Goldman's language -- a "shitty" bet. Goldman agreed to review certain business practices, which is a good thing to do after an unprecedented financial crisis, with or without fraud allegations.

The terms of the settlement agreement represent concessions on both sides, but the most offensive part of the whole ordeal was the SEC's presumption of ignorance of investors and taxpayers following the saga. Since the settlement was announced late on Thursday, though, Goldman's stock has shot up over 7% -- even in the midst of a sell-off in other big financial names.

Sandler O'Neill analyst Jeff Harte said the settlement was a "clear positive" for the stock going forward, and he expects the shares to see renewed interest from large institutional buyers.

"You have to hand it to Goldman Sachs," says Peter Cohan, a columnist for


. "It knows how to make a deal."

-- Written by Lauren Tara LaCapra in New York


Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.