Goldman and Wall St will rise again

BBC business editor Robert Peston on Goldman's annus horribilis

For most of us, $550m is a colossal sum of money - and it is the largest ever penalty extracted from a Wall Street firm by the US Securities and Exchange Commission.

But some will argue that Goldman Sachs got off lightly in this settlement of the charge that it misled investors when selling them a so-called collateralised debt obligation called Abacus 2007-AC1.

Goldman has not admitted the charge, but it has acknowledged that marketing material for the CDO was "incomplete" - in that the firm didn't disclose that a hedge fund, Paulson, helped select the investments that went into the CDO, and that Paulson was planning to bet the CDO would collapse in value.

When Abacus 2007-AC1 duly did collapse in price, Paulson made a bundle - and two investors, IKB and Royal Bank of Scotland, lost $150m and $841m respectively.

In respect of the deal in isolation, $550m looks like a hefty fine. But it is only 1.2% of Goldman's net revenues last year of $45.2bn and just 3.4% of bonuses and salaries paid to staff.

It is what you might call grit in the Goldman wheel rather than a fundamental challenge to the way it does business.

As for the recipients of the $550m, $300m goes to the US Treasury, $150m to IKB and $100m for Royal Bank of Scotland.

For lossmaking RBS, every little helps - but this really isn't life-changing, as its just 0.17% of 2009 revenues.

RBS is consulting its lawyers about whether there's any chance it can extract more from Goldman.

It's certainly been an annus horribilis for Goldman - pilloried as it's been by media, regulators and politicians for week after relentless week.

But there is significant comfort to be had for Goldman and the rest of Wall Street, in that their profitability doesn't look hugely threatened by the financial regulatory bill that finally - after so much lobbying, political horse-trading and re-drafting - obtained congressional approval yesterday.

There'll be tighter oversight of derivatives trading - with much of the business directed through clearing houses and central repositories in the hope it becomes more visible. The supposedly riskiest derivatives business will be forcibly separated into separately capitalised affiliates.

Also investment banks will have to demonstrate that their trading activities are explicitly for the benefit of clients rather than for themselves, with trading for their own account - or proprietary trading - banned. Which will lead to an overhaul of the money-making practices of Goldman in particular.

In a related reform, investment banks' direct investments in hedge funds and private equity must shrink (over time) to no more than 3% of their capital.

None of which is trivial for the likes of Goldman, JP Morgan, Morgan Stanley, or even the UK's Barclays Capital (owner of the rump of Lehman). Wall Street is paying for its contribution to the worst banking crisis since the 1930s.

But the new regulatory tariff is not life threatening: Wall Street's history demonstrates that in the ruthless pursuit of profit, few firms on the planet are more adaptable.

Update, 08:28: This may make you chuckle: apparently Royal Bank of Scotland had no idea it was in line for a slug of the SEC penalties paid by Goldman, so it regards the $100m it has netted as something of a windfall.

And RBS's lawyers continue to review whether it has a case for independent legal action against Goldman to recover the rest of that $841m.

RBS would argue that it hasn't been short changed by the SEC settlement with Goldman, but that the $100m is a lottery win (well, almost).

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

More on this story

Around the BBC