Goldman's penny punishment By Hossein Askari and Noureddine Krichene
And he looked up, and saw the rich men that were casting their gifts
into the treasury. And he saw a certain poor widow casting in thither two
mites. And he said, Of a truth I say unto you, This poor widow cast in more
than they all: for all these did of their superfluity cast in unto the gifts;
but she of her want did cast in all the living that she had.
- Gospel According to St Luke
The Barack Obama
administration and the US Securities and Exchange Commission (SEC) must have
missed the lesson of the parable of the widow's mite in their upbringing and
education. They should read the parable over and over again to get the
message. The New York judge, the Honorable Barbara S Jones, who must still
approve the settlement of the SEC's case against Goldman Sachs, should do the
same before passing judgment.
The pending settlement of the case against Goldman Sachs, which was originally
filed in April of this year, calls for a payment of US$550 million ($300
million to the US Treasury and $250 million to investors who lost in
mortgage-backed securities that Goldman marketed) and does not require an
admission of wrongdoing on the part of Goldman Sachs (normally the case in such
settlements); instead, Goldman just admits that it gave "incomplete
information" and that this was a "mistake" that it "regrets", and hands over
the $550 million.
Now $550 million is a lot of money to mere mortals, that nobody can deny. But
to Goldman Sachs? It is equivalent to just 4% of Goldman's net earnings for
just one year, 2009 ($13.38 billion); or 3.4% of its bonus pool ($16.2 billion)
for 2009. All this in one year, a year while the rest of the world was
suffering.
These percentages aren't exactly equivalent to the pain felt by the widow in
the parable. Just imagine, would you be in desperate straits and forced to
change your ways if in one year of your life (note: not every year) you had
lost 3-4% of your income? You get our drift. There is no pain in this
settlement for Goldman. The financial markets gave their verdict, the price of
Goldman's shares went up after the announcement was made: "Good deal Goldman
Sachs, you did it again."
The $250 million of the $550 million destined for all those investors who lost
in the mortgage-backed securities that Goldman marketed, represents only a
fraction of the losses of one UK institution alone. Is this asymmetry between
investor losses and Goldman payments fair? Is this just?
Now compare the aggregate pain inflicted on Goldman, its employees and its
stockholders by this $550 million pending settlement to the aggregate pain
inflicted on the millions of families in the United States and around the world
who have suffered as a result of the financial crisis and the economic
downturn.
Admittedly, the crisis was brought on by the misdeeds of other financial
institutions and a host of other factors such as the failure of the US Federal
Reserve policy, proliferation of debt and financial leveraging, misguided
deregulation, inept supervision and more. But a key financial institution,
Goldman Sachs, which was central to the excesses of Wall Street and received US
government support when it was on the brink of collapse, has suffered almost
nothing at all, while Main Street continues to bleed with no relief in sight.
What did the taxpayer do for Goldman? When Goldman was potentially on the brink
of collapse, it was allowed by the Fed to convert its status from an investment
bank to a bank holding company, affording it government support and protection.
This resuscitated Goldman from near death. Goldman received TARP (Troubled
asset Relief Program) funds (which it has since paid back with interest). It
received 100 cents on the dollar from the insurance policies (more correctly,
credit-default swaps) that it had purchased from what was a bankrupt company,
AIG, which was given federal dollars to hand over to Goldman.
How much? $13 billion, that's how much. Now that's 23.6 times, or 2,360% of,
the $550 million settlement. Some have even suggested that the amount might
have exceeded this as Goldman may have received some indirect payments through
other banks that received federal dollars from AIG. No bankrupt firm, such as
AIG, pays off its creditors 100 cents on the dollar - but with taxpayer money
and Goldman, anything goes.
This is the treatment that Goldman got. How did it treat the taxpayers? It
turned around and paid its employees obscene bonuses while taxpayers suffered,
with about 50 million Americans on food stamps. And as compensation for its
excesses, Goldman set up a $500 million fund to assist small business and now
this pending settlement.
Let's get back to the lawsuit and the settlement. Why did the SEC file the
case? Presumably it thought it had a case. Presumably, it was seeking justice.
And presumably an integral part of seeking justice was to cause enough pain to
Goldman that it would never do the same again, or that at least it would think
long and hard about any such transgression in the future, and hopefully in the
process to send the rest of Wall Street a strong message.
Well, you be the judge. In retrospect, the SEC may not have achieved any of
these goals and its actions may have, in fact, done more harm than good. Again,
Wall Street signaled its reaction in the aftermath of the settlement; Goldman
shares climbed. So the message to the rest of Wall Street is not exactly of a
tough SEC, tough enforcement, or of changed oversight of Wall Street
shenanigans.
Robert Khuzami, the SEC's chief enforcement lawyer and the man who represented
the commission, has said the opposite of our conclusion. He has claimed victory
because this is the largest fine in history. In this he clearly has not
appreciated the parable of the widow's mite. Goldman Sachs feels little, if
any, pain. Moreover, while the fine may appear large, the destruction caused by
Wall Street and Goldman Sachs is significantly larger.
In support of Khuzami, we know what some legal minds have declared that this
was the best that the SEC could get because its case was not tight and strong.
If this were true, then the SEC should never have filed the suit, as it may
have done more harm to Wall Street's perception of enforcement; before the suit
and the settlement, Wall Street might have thought that the authorities had
toughened their enforcement policies, but now the cat is out of the bag and
they see that nothing has changed.
It would have been better for the SEC to fight and lose than to settle so. By
fighting the case in court, the SEC would send a much stronger message (your
reputation will be impaired as you will be in the headlines for months, not
weeks) to Wall Street about future transgressions. Rest assured, future
transgressions there will be; it's only a matter of time.
Let's face it - the US government and the two political parties are owned by
the financial industry. US financial firms, such as Goldman Sachs, are having
to pay back much more in Europe through higher taxes on bonuses than they will
ever pay in fines and paybacks to the US, the country that rescued and
resuscitated them. On July 20, 2010, Goldman reported that it had paid $600
million in such taxes in the UK alone.
What has the financial industry done for the real economy that we treat them so
well? At a recent conference at the London School of Economics on July 14, the
message of experts was clear. Quoting one of the authors, The Economist
reported that the success of finance has been "as much mirage as miracle". The
summary is not at all surprising: "The financial industry has done so well for
itself, in short, because it has been given a license to make a leveraged bet
on property ... The cost of that lesson is now being borne by the developed
world's taxpayers."
The financial industry has received significant subsidies from governments;
these subsidies have reduced their funding cost; and as result, over the past
30 or so years the financial industry has captured a growing share of the
economy and it has prospered at the expense of the real economy.
It is now all up to the judge in New York. She is our last hope. If she
approves the settlement, then the message that the SEC and the US government
will be sending out to the financial industry is loud and clear: "No harm done,
continue as you were."
Hossein Askari is professor of international business and international
affairs at George Washington University. Noureddine Krichene is an
economist with a PhD from UCLA.
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