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Goldman’s Grand Delusions Finally Hit Reality: Jonathan Weil

At least for one day, after years of milquetoast responses to financial depredations, the Securities and Exchange Commission finally can boast that it’s doing God’s work again.

Here’s the real beauty of the SEC’s settlement agreement yesterday with Goldman Sachs. The next time Goldman Chief Executive Officer Lloyd Blankfein goes on television and is asked by some reporter if Goldman committed securities fraud, as the SEC alleged, he won’t be allowed to say no.

He won’t be able to repeat any of the factually improbable denials Goldman issued just three months ago after the SEC sued it for ripping off a hapless German bank named IKB as part of a bond deal called Abacus 2007-AC1. He’ll just have to suck it up and take the hit. It’s “the right outcome for our firm, our shareholders and our clients,” as Goldman said in a press release after the settlement was disclosed.

More incredibly, the SEC even got Goldman to admit it made “a mistake,” which might be the strangest thing ever to happen on Wall Street. Next thing you know, Blankfein will grow wings for his trip to the heavens, and Goldman will surrender its charter as a bank-holding company to become a nonprofit center for religious studies.

State of Mind

So here’s where the case stands now. The SEC’s April 16 complaint accused Goldman of committing securities fraud with scienter, meaning with intent or knowledge of wrongdoing. Had it been so inclined, the SEC could have filed an amended complaint accusing Goldman of a less serious offense instead, rather than fraud, as part of its settlement with the bank. The commission didn’t do that, though.

While Goldman isn’t admitting the SEC’s fraud allegations, it isn’t denying them either, because it’s prohibited from doing so under the settlement terms. Oh yes, and Goldman will have to pay $550 million, much of which will go to the investors Goldman allegedly fleeced.

What a difference a few months makes. Back on April 16, after the SEC filed its suit, Goldman issued a press release wailing that “the SEC’s charges are completely unfounded in law and fact, and we will vigorously contest them and defend the firm and its reputation.” Looking back, it seems Goldman made a typographical error by omitting a few words at the end of that sentence: “until July 15.”

Designed to Fail

For those who have forgotten the details, the SEC’s lawsuit accused Goldman and a vice president, Fabrice Tourre, of making false and misleading statements to investors about a synthetic collateralized debt obligation that was designed to fail. The SEC said the firm’s main offense was telling IKB that a company called ACA Management had selected the portfolio of mortgage- related investments underlying the deal, when actually the selection process was heavily influenced by Paulson & Co., a hedge fund that later made $1 billion shorting Abacus.

Back in April, Goldman insisted that ACA “selected the portfolio,” just as its sales materials said.

Now, as part of the settlement, Goldman has admitted “it was a mistake for the Goldman marketing materials” to omit “the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson’s economic interests were adverse” to the bond’s investors. The consent decree added: “Goldman regrets that the marketing materials did not contain that disclosure.”

Pay Attention

So all that stuff Goldman told the public in its defense a few months ago was just PR bluster. As for Tourre, who has denied the SEC’s allegations, he still hasn’t settled, and now Goldman has agreed to cooperate with the SEC in its case against him. He should have paid closer attention to my colleague Michael Lewis’s column two years ago on how to save your skin in a Wall Street massacre.

Rule No. 1: Betray your employer before your employer betrays you.

We can only hope all this will prove to be a humbling experience for Goldman, though that may be wishful thinking. The SEC accord, if approved by a federal judge, mandates new internal bureaucratic hoops for Goldman’s mortgage department to jump through before issuing mortgage securities in the future. Each person involved in structuring or marketing mortgage bonds will be required to attend training seminars on how to comply with the federal securities laws. (Talk about humiliating.)

Hear No Evil

What remains to be seen is whether Blankfein and the rest of Goldman’s bosses can pull off this settlement while at the same time saving face. Just 11 weeks ago, Blankfein was asked during a daylong Senate hearing on Abacus and other Goldman deals if he had any “legal, ethical or reputational” concerns about any of the activities undertaken by Goldman employees. “I heard nothing today that makes me think anything went wrong,” Blankfein said.

It’s hard to imagine Blankfein believed that then. It may take a miracle for the public to accept anything he says at face value now. That’s a heck of a liability for a company whose most valuable asset is supposed to be trust.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

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