Will Goldman Settle SEC Case?

Goldman may try to settle the SEC case it faces rather than endure an embarrassing court battle, a new report from the New York Post indicates. Earlier this week past and present Goldman executives endured an 11-hour witch trial-like hearing before a Senate committee where there was broad bi-partisan anger at the bank's actions leading up to the financial crisis. Goldman may feel that it's worth paying up instead of going through that sort of thing for weeks at trial. Still, given the bank's unwavering claim of innocence, a settlement would be a little surprising.

The New York Post reports:

"It's almost a certainty that there will be a settlement," said a source.

As another person put it, the SEC has an "unlimited supply of ammunition" in the form of e-mails and records that it could release, and Goldman officials would like to avoid having those documents fired back at them the way they were on Tuesday.

The problem with settling, of course, is that it means a defendant is implicitly admitting guilt. If there was anything clear through Goldman's marathon testimony on Tuesday, it was the bank's unflinching belief in its innocence. The only banker named in the suit, Fabrice Tourre, "categorically" denied that he did anything wrong. All the others testifying, including Goldman CEO Lloyd Blankfein, swore innocence as well. If they were planning on settling anyway, you might have expected at least a slightly more apologetic tone. Instead, they were brazen throughout the questioning.

Considering the defense it intends to take, they also might have a pretty good chance at winning. Whether they misled collateral manager ACA comes down to a dispute of fact, which should be easily shown in Goldman's favor if its executives are telling the truth.

The harder question is whether they should have disclosed hedge fund manager John Paulson's involvement in the portfolio selection to the investor IKB. Goldman has a pretty strong argument that it was immaterial for two reasons. First, ACA ultimately had the authority to decide which bonds to pick, and in fact threw out many of those Paulson suggested. So the disclosure was accurate and complete. Second, pool selection influences aren't relevant to an investor's analysis. If the investor is given all available statistical information to analyze the collateral, then it should be indifferent to how the portfolio happened to be chosen.

Goldman must be asking itself: will there be more reputational harm done to settling a suit and implicitly admitting guilt, or by enduring a grueling trial but possibly winning. Neither is a particularly good alternative, but this question should be considered in the context of how it might affect the firm's client relationships.

Goldman's customers are almost exclusively other financial firms or giant corporations. Most people at such companies understand the nature of derivatives and a broker-dealer's fiduciary duty. As a result, it's likely they most of its clients considered this week's hearing a performance for Senators to score political points, rather than a just censure of Goldman. This week's hearing surely brought more applause from average Americans outside big business and high finance -- those who are not clients of Goldman Sachs. So its actual past and future customers might find admission of fraud more troubling than a messy trial.

However, those average Americans might be the ones sitting on the jury, and that's a problem for Goldman. The argument for taking the case to court, hinges on the likelihood that Goldman can win. Since this case is intended for a jury, that might be tough. The subject matter is complicated, and few people outside of Wall Street have a positive opinion of Goldman. So there's also a possibility that even though Goldman believes in its innocence, it's smart enough to question the likelihood that a jury will accept its version of the truth.

(h/t: Felix Salmon)

(Nav Image Credit: Chris Hondros/Getty Images)