The Securities & Exchange Commission on Friday sued investment bank Goldman Sachs for defrauding investors. It could severely damage Goldman’s reputation and a settlement, if it happens, could be very expensive.
The sheer spectacle of the U.S. Government charging Wall Street titan Goldman Sachs with civil fraud has been enough to rattle the financial markets and send Goldman’s shares reeling. At midday, the investment bank’s stock was down more than 12% and the price of put options on Goldman shares (bets that the stock will keep declining) were up dramatically. But beyond the organizational earthquake that has just been unleashed at Goldman— possibly damaging its reputation for years to come— how much money might it actually have to fork over?
Whether the case goes to trial or is settled out of court, the fines and penalties could be steep if Goldman is found at fault. At first blush it’s just pocket change for the giant investment bank, which had revenues of $51 billion last year. The $15 million fee that Goldman earned for putting together the now infamous CDO security known as ABACUS 2007-AC1 (ABACUS) will surely be disgorged if it loses at trial or reaches a settlement, and it could easily be tripled as part of the penalty.
But the SEC could also cast a wider net when considering what Goldman should pay, and if the case goes to trial the discovery process could reach far and wide in tallying damages. The SEC charge against Goldman says that “The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties.” According to a government source familiar with the SEC investigation, among the possible considerations under that broad umbrella is the billion dollars lost by investors in this CDO. This is not a certainty, but nor is it without precedent. When the SEC settled with Citigroup and UBS over auction-rate securities in December 2008, part of the settlement was that the firms had to buy back the securities that they had sold to investors— at the original prices. The settlement ran into the many billions of dollars.
If Goldman has to buy back its securities that could get expensive. Investors in Abacus lost a billion dollars as the security was downgraded, according to the SEC suit. Conceivably, penalties could make that payout even larger.