SEC Enforcement of Goldman Sachs and AIG Research Paper

Goldman Sachs & Co. and Fabrice Tourre were charged by the SEC in 2010 with “Fraud In Connection With the Structuring and Marketing of a Synthetic CDO” from the 2007 subprime mortgage scandal at the heart of the financial crisis of 2007-2008 (SEC, 2010). The specific charge was that the bank and Tourre made material misstatements and omissions in connection with a synthetic collateralized debt obligation that the bank had structured, marketed and sold to investors. The synthetic CDOs were linked to the performance of the subprime housing mortgage market—i.e., the subprime mortgage-backed securities identified by Lewis (2010) as triggering the wave of financial distress that led to central banking intervention (unconventional monetary policy—also known as quantitative easing) and the inflation of asset bubbles currently seen today (Huston & Spencer, 2018). Goldman Sachs settled with the SEC and agreed to pay $550 million on the condition that the bank not be required to admit any wrongdoing. Tourre refused to settle and the case went to trial. He was found guilty by a federal jury and did not appeal. Tourre was ordered to pay $825,000 in penalties (Baer, 2014).

The impact of the charges on Goldman’s reputation and stock price were not negligible. Charges were filed in April 2010. GS stock was trading at $180. By June of 2010, the stock had fallen to $131. It rebounded to $175 by January of 2011 before falling back to $88 in November of 2011. From that low, the stock has bounced between $275 and $150 and currently trades just shy of $225 (thanks in no small part to central banking intervention and quantitative easing). The company’s reputation was hurt but not so extensively as one might think: the bank is still recognized as one of the top financial leaders in the industry and its role in the financial crisis of 2007-2008 was not much different from the role of any of the…

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…analyzed in this context, it could certainly be argued that Goldman’s settlement is out of proportion with the amount of pain the bank helped to cause the global economy. The settlement with the SEC was but a drop in the bucket of the bank’s overall annual revenue and can hardly be considered proportionate to the damage Goldman helped bring about. However, for Goldman to be held accountable in a much more severe manner would have meant, essentially, an undoing of the current financial system since Goldman alums sit in powerful positions throughout that system all over the world (Draghi at the ECB, Mnuchin in the U.S. Treasury, Carney at the BOE and so on). Goldman is one of the most powerful banks in the world and thus can truly be considered “too big to fail” for the fact that it is never really going to be held accountable so long as its alums continue to preside in positions of power.

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