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Goldman Abacus Settlement: $550M in Hush Money

posted by Adam Levitin

The SEC settled with Goldman Sachs for $550M over Goldman's lack of disclosure in the Abacus 2007-AC1 CDO.  While this is a record settlement for the SEC, I think the settlement is a real disservice to the public because it means that we will never have the opportunity to really learn just what was going on in the bowels of Wall Street in the run up to the financial crisis.  The real value of the Abacus litigation was it was a chance to shine some sunlight on the inner workings of Wall Street.  The complaint and hearings gave us a taste, but if this litigation went further, we would likely have learned much, much more.  Instead, Goldman paid the SEC $550 in hush money and will succeed in keeping further details of its operations under wraps.  

The SEC's Abacus litigation seemed to hold the promise of becoming a modern Pecora commission, delving into the origins of the crisis.  Sure, we have the Financial Crisis Inquiry Commission, but the FCIC will never manage to get to the level of detail that emerges as a by-product of litigation.  For $550M, we will all continue to remain ignorant.  

For Goldman, the total amount of the settlement is frankly insignificant and unlikely to serve as a deterrent to future wrong-doing.  The real cost to Goldman is reputational, but through the settlement, Goldman can largely put the Abacus issue behind it.  Goldman's shares rallied 4% leading into the announcement (other banks rallied too, but not so much), and then fell just a hair thereafter.  In short, the market doesn't seem to think that this settlement had any punitive effect on Goldman.  

For the SEC the settlement is a real coup.  It can revel in a blockbuster settlement that shows that there's a cop back on the Street and put another moosehead up on the wall.  But does that really matter?   Would anyone really care if the settlement were for a clean $1B?  That's still chump change on the Street.   Unfortunately, though, in this case what's good for the SEC is not in the public's interest.

Comments

I'm a broken record at this point but as long as there is no accountability, i.e. "no admission of wrongdoing", how can there possibly any kind of REAL honest to god financial reform in the United States? $550M ?!?!? What are the policy limits on the D&O and E&O insurance policies that GS has?

Take a look at pdf p18 of the ABACUS flip book. http://www.google.com/url?sa=t&source=web&cd=1&ved=0CBQQFjAA&url=http%3A%2F%2Fwww.scribd.com%2Fdoc%2F30036962%2FAbacus-2007-Ac1-Flipbook-20070226&ei=5p8_TNXwG4G88gbri4WyCg&usg=AFQjCNGRebBhe1IkMv8zsFQ00ZDViUqawg
Servicers involved are disclosed here.
Wells Fargo 28.9%
Option One 13.3
Select Portfolio 7.8
Servicing
Washington Mutual 6.7
Countrywide Home 5.6
Loans Servicing
Total: 62.3%

GS made it a point to disclose that 24 servicers were involved in ABACUS 2007-AC1. These are the top 5 individual servicers. SPS and Countrywide have both settled FTC enforcement actions involving an estimated 500,000 victims for a total of $148 Million in restitution.

To put it bluntly, what quality servicing did GS think they were really going to get here? Unless, of course, that is EXACTLY the kind of servicing that they were looking for in order to ensure that the individual tranches tank.

We KNOW that the individual servicers were betting/hedging against the trusts they were servicing. Ocwen put out a press release on it a few years ago.

With this settlement, it is my non-anything opinion that consumers AND investors are officially on their own with regard to covering their six. The only thing that is going to do effect any kind of "change" is litigation and legal precedent. Again, in my purely non-anything opinion, the strongest class that could possibly exist to successfully change the face of the RMBS market, and industry in general, would be if the investors and the homeowners got together and shared their collective info.

The investors and the homeowners are on opposite ends of the equation here. And BOTH are being played against the middle - where the servicers are. Ellington Credit Fund v. Fairbanks/SPS. MBIA v. Credit Suisse, DLJ and SPS. The list of investor suits in the industry is growing longer and involving more and more entities. Maybe if both ends start talking to each other they can collectively manage to reform the middle and get it under control for a change.

Until and unless that happens, "without admitting any wrongdoing" is saying the same as "the cost of doing business". $550 Million.... Litton Loan Servicing alone will have that "recovered" for GS before the next shareholder's meeting.

I guess and hope everyone here knows that Elizabeth Warren is a candidate to head the CFPA, Consumer Financial Protection Agency. If you appreciate Miss Warren's efforts and kindness to the consumers/depositors/taxpayers/voters of this nation as much as I do, you will take the small amount of time and effort it takes to sign this petition to support her for the job. Since the lap dog/lackey of the large bankers---Timothy Geithner---is working behind the scenes against proper bank supervision and controls (and HENCE against Miss Warren) it is nowhere near a forgone conclusion Elizabeth Warren will receive the job. Please take the 3 minutes time to sign this petition to let President Obama know you want a REAL "tigress" in there protecting bank depositors' safety and protecting taxpayers' hard earned dollars from unnecessary bailouts due to big banks' corruption and predatory practices.

Go to this link to sign the petition.
http://act.boldprogressives.org/cms/sign/petition_warren/?source=hill

I think the case did what it was supposed to do which was goose the financial reform bill in the Senate. It is a good settlement because the underlying case was so weak. I think GS paid what it paid because of the collateral damage from media coverage conducted by people who do not know anything about any aspect of the subject matter of the litigation.

Completely off topic but I think you will enjoy this link

http://www.palantirtech.com/government/analysis-blog/horizon

It is (or purports to be) a demonstration of a software analysis of approx 500 million mortgagte applications for evidence of predatory lending. I linked to it via Infectious Greed.

I'll be in agreement with adam with this one, many settlements that never go to trial never benefit the public, is true settlements should be allowed in certain cases, especially in class action lawsuits where the company really messes up but both sides don't want to go to trial and want to resolve. But here the government is suing and settling, is it enough, probably not, will it generate publicity, yes but only in the short term. Its politics, a lot of people in the washington area have worked and have connections to goldman including at educational schools in the DC area, I'm not going to get into specifics, but you need to understand the politics, you know who you are.

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