Colin Barr

Following the money in banking, economics, and Washington

5 keys to a Goldman-SEC settlement

July 15, 2010: 2:15 PM ET

Goldman Sachs is trying to gin up a chaser for the mother of all legal headaches.

Three months after the Securities and Exchange Commission stunned Wall Street by filing a fraud suit against Goldman Sachs (GS), the securities firm is pushing for a settlement. Goldman surely would like to have the case closed by the time it faces investors after next Tuesday's second-quarter earnings report.

Take a billion and call me in the morning.

The SEC is less anxious but might just as soon avoid going to trial. A loss could deal a crushing blow to the agency's tottering reputation.

"This case is no slam dunk winner for the SEC," said Peter Henning, a law professor at Wayne State University in Detroit. "And you know Goldman would love to turn this into a one-day news event and get out of the headlines for election season."

Here are five things to look for in a Goldman-SEC settlement:

*A really big check. The SEC alleges Goldman's actions caused investors in a 2007 Abacus CDO $1 billion in losses. Analysts thus expect the firm to pay at least that much to settle.

The tab could run even higher if the SEC agrees to include other mortgage-related cases. But the broader the settlement, the greater the risk for SEC chief Mary Schapiro, whose agency took a hiding in federal court last fall when it tried to settle a case against Bank of America (BAC) on terms a judge scorned as too easy.

"Schapiro has to think through how she's going to sell this one," Henning said. "If you bargain away Goldman and another big case comes up, you could end up getting the finger pointed right back at you."

*No fraud finding. Goldman has said it did nothing wrong in the Abacus case, which centers on the firm's failure to tell a big German bank and a bond insurer about short-seller John Paulson's role in selecting the investments. Goldman can't afford to settle without the SEC dropping the fraud charges, because allowing them to stand could hit the firm's reputation, sent clients to other banks and lead to a flood of civil suits.

*A Goldman ankle bracelet. Henning says he believes the SEC won't settle unless Goldman agrees to appoint an outside monitor to keep an eye on the firm. Goldman this spring set up a committee to review its business practices, but regulators would look like pushovers if they left oversight with people who report to CEO Lloyd Blankfein or the firm's scandal-ridden board.

A monitor or other changes in how Goldman is run won't be an easy sell, however. "I suspect GS will fight tooth and nail to keep oversight over itself," says Eric Jackson, an investor who has called for a board overhaul.

*Solace for CDO losers: Investors in IKB and ACA, which bore the losses when the Abacus deal went sour, could get some money back if the SEC channels Goldman settlement payments into a so-called fair fund. That could end up setting the broad outlines for future settlements in CDO-related cases.

*More family time for Blankfein. Regulators almost surely won't try to push the Goldman chief out. After all, Eliot Spitzer claimed Hank Greenberg's scalp at AIG (AIG) a few years back, and that didn't exactly work out.

But after the dust settles, Goldman might just decide on its own that it's time for new leadership. Blankfein has been around for four years, and even a relatively favorable SEC settlement surely won't end Goldman's legal troubles. Better to have fresh blood to handle those.

"Maybe a new CEO could clear the decks," Henning said.

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Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for since November 2007. Previously he was a writer and editor for, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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