Goldman's SEC Case Settlement Calculus

Is Goldman willing to admit wrongdoing and settle the lawsuit the SEC has brought against the banking titan? A new report from John Carney at CNBC suggests that it could be -- depending on precisely what that admission entails. If the SEC takes fraud out of the equation, but leaves negligence, then the bank might be willing to endure a hefty fine to finally bury the incident.

Carney writes:

Goldman might accept a settlement if the civil charges requiring fraudulent intent or claiming a scheme that operated as fraud were dropped, a source said. That would leave open the charge of merely negligently "misleading" the investors in the Abacus deal. A source close to the matter indicated that this would be far more palatable to the company since it does not explicitly implicate Goldman in fraud.

It's one thing for a company to say it made a mistake. It's a very different thing to say it intentionally misled its customers. That's the difference here. Obviously, the latter looks far worse than the former. Carney says that the fine could be the same either way -- as much as $1 billion -- but that's not the big issue because, as we all know, Goldman can afford it. The firm cares more about its reputation than a measly billion.

So what if the SEC doesn't agree to drop the fraud charge? Goldman may reluctantly go to court. In a separate report from last week, Carney learned that Goldman was readying itself for trial, if necessary. There's little doubt that Goldman would love to avoid that outcome, but not at the cost of admitting to fraud.

The big question, of course, is what the SEC is willing to accept. This case has become incredibly high-profile. If the SEC drops the fraud allegation, then the public might interpret this as the regulator going easy on Goldman -- even if a big monetary settlement is attached. But the SEC must also worry about a possibility of losing in court, and failing to have any allegation stick or imposing any fine. That is, if the real goal here isn't simply to make Goldman look bad, which a court battle would likely achieve even if Goldman wins.

The possibility that this case goes to court is looking more and more plausible, however. That may result if Goldman insists that the fraud charge is dropped, but the SEC doesn't go along. After all, if Goldman most fears the fraud allegation, then why not endure a trial? Then, at least there's a chance the firm can escape the fraud verdict, instead of simply admitting it through a settlement. Could a trial really result in the public adopting a much worse view of the firm than it already holds after witnessing the Senate's 11-hour marathon hearing in April?