US regulators yesterday demonstrated their determination to crack down on Wall Street's excesses during the subprime mortgage crisis by handing Goldman Sachs a fine of $550m, and warning that "half truths and deception" would not be tolerated.
In the humiliating settlement with the Securities and Exchange Commission, Goldman accepted the largest fine in the commission's history and accepted that the marketing materials it issued to investors for the Abacus transaction at the heart of the regulator's case gave "incomplete information".
The commission made clear that despite the settlement, in which Goldman did not admit or deny the damaging allegations, Fabrice Tourre, the employee who had been involved in marketing the collateralised debt obligation (CDO), remained under investigation.
Robert Khuzami, director of the SEC's division of enforcement, said: "This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing." Deputy director Lorin Reisner added that "the unmistakable message of this lawsuit ... is that half-truths and deception cannot be tolerated".
Rumours that Goldman and the commission had settled swirled across Wall Street towards the end of trading, helping the Dow Jones to claw back a 100 points loss to end seven points down. Goldman's shares leapt $6.16 to close at $145.22 even though the Senate had earlier passed rules that promise to herald the biggest changes to Wall Street since the Depression.
The Abacus case had called into question the integrity of Wall Street after the commission alleged Goldman had packaged up mortgages into Abacus and then sold the CDO to investors without telling them one of its powerful clients, the hedge fund Paulson, had been taking a trading position intended to profit from a fall in the value of US house prices. Goldman had told investors that the mortgages included in the deal had been selected by a specialist firm ACA but admitted yesterday that it should have acknowledged that Paulson also had a role in deciding which mortgages were selected. "Goldman regrets that the marketing materials did not contain that disclosure," the firm said.
Of the $550m fine being levied on Goldman, $250m will be paid to investors who lost out from the deal while the remainder will go to the US Treasury. As part of the settlement, Goldman acknowledged it was conducting a sweeping review of business standards.