Regardless of how the legal battle turns out, it’s pretty evident that Goldman was not acting in the interest of the clients to whom it peddled the deal. Whether or not Goldman’s behavior was illegal will be left to judge and jury; whether its actions were unethical will be decided in the courts of public opinion and by its clients.
Regardless of whether they win their case, the SEC will achieve its goal of exposing unethical behavior that flies in the face of Goldman’s purported “customer first” culture.
At the same time, it’s likely that the SEC will bring charges against other firms, perhaps Deutsche Bank for the Magnetar deal.
This will strengthen the SEC; Mary Schapiro has already demonstrated a much more aggressive approach to enforcement than Chris Cox or, certainly, Harvey Pitt. I think that it will also make CEO’s of financial institutions approach their business differently. No longer will the signoff of the firm’s general counsel be enough to say that something is legal; unethical behavior can bring punishment as well.
It’s already apparent that derivatives regulation is getting a new bounce from this and will likely be part of a banking reform package more likely to now pass. Meanwhile, Goldman is likely to have some fallout from clients, particularly public pension funds.
Now, there are many who will argue that the SEC (or any regulatory body) is overstepping its bounds by using litigation as a means to punish, even if they don’t believe they will ultimately win. But the regulators are working from a position of weakness. Policies of the past decade, combined with budget cuts have lessened their authority and effectiveness. Meanwhile firms often see fines as simply the cost of doing business.
But it wasn’t the $16m fine that has so damaged Toyota and it won’t be the dollar value of any ultimate fines handed down by the SEC that hurts Goldman, Sachs. The only real asset a financial institution has is its reputation and, win or lose, the SEC has already tarnished the appearance of 85 Broad.
