Well, risky as it is to attempt to wrap up an assessment of
the Goldman case while news is constantly streaming in, I’m going to give it a
shot, if only because I
said I would. Of course, we
may learn yet more information this week during the upcoming
Senate subcommittee hearings.
When the SEC first filed, my
initial reaction upon reading the complaint, and before Goldman had come
out with fists swinging, was that it was a hard case – neither the SEC’s case
nor Goldman’s defense of it were slam dunks. Although I still largely believe that to be the case, at
least some of the news that has come out in the intervening week hurts the SEC.
For example, Goldman’s contention that ACA was actually
aware of Paulson’s short interest from the beginning, if true, to my mind is highly
damaging, and I’ve been puzzled by some of the commentary that seems to
consider this information relevant only to the question of fraud vis-à-vis ACA. If ACA was aware of Paulson’s adverse
position all along, then the contention that Paulson exercised any meaningful
influence over portfolio selection, and thus performance, is substantially
diminished. This should affect the
materiality inquiry for the entire case and I, suspect, the causation inquiry
as well.
But leaving legal technicalities aside for a moment, the
broader question arises of what purpose this case serves. The SEC, as we’re constantly reminded
when criticisms of their various failures emerge, has limited time, resources,
and personnel. Unquestionably, this
is the type of case, and the type of defendant, that will consume
resources. And it increasingly
seems to me that those resources would have been better spent elsewhere.
Of course, the SEC shouldn’t shy away from a case simply
because it’s difficult, and there may be times when regulators feel they have
to push the contours of existing law in the name of meaningful investor
protection. But I’m becoming progressively
less convinced that this case has meaningful implications for investor
protection.
And in the end,
I’m left wondering: is this the best the SEC could get out of the crisis?
Presumably, the SEC, which as I understand it, combed through hundreds, if not
thousands of deals, picked this case on purpose. And this is the best they
could do?
I’m somewhat reminded of the Martha Stewart insider trading
case, in which large resources were consumed to go after a big fish in a case
that would otherwise be small fry, were the defendant not widely disliked. Moreover, the condemned conduct in both
cases is assumed to be widespread.
Thus, the government’s action is defended against critics as a means to prove
a point. The problem, though, is
that it’s often unclear what that point really is, beyond sticking it to an unpopular
defendant and the opportunity for high-profile agency action.
If that’s the case, then what explains the market’s sustained
negative reaction to news of the suit?
It’s certainly not the likely damages and penalties associated with the
case itself. It could be that GS
is suffering a reputational cost because clients will no longer trust them;
though, based on the facts as alleged so far, I have my doubts about that. It could also be the case that
the market fears this is the tip of the iceberg – as the SEC and Congress start
digging, they’ll find more damning facts.
This seems more likely.
But, perhaps the best explanation is that the SEC’s suit, and the way in
which it was brought (with no or minimal
attempt at advance settlement), signals a sea change in government
attitudes toward perceived Wall Street excess, currently exemplified by Goldman
Sachs. And that could be very bad for business.
Related
Posts:
The
Abacus Offering Circular
The Goldman Earnings Call, Part 2
(It’s Not Our Fault Other People Are Stupid, And By The Way, We Lost A Bunch of
Money Too)
The Goldman Earnings Call, Part 1: ACA Chose
and It Doesn’t Matter Anyway
The Goldman Complaint