Goldman Sachs - Between A Rock & A Hard Place

With $20bn wiped off the value of Goldman's stock in the last 2 weeks, and the media onslaught continuing to pound the firm, wouldn't Goldman be better served by settling the fraud case brought against it by The Securities and Exchange Commission (SEC) and moving on ?

The problem now, of course, is that there is also a criminal probe in the background, and this may make it more difficult for Goldman to settle with the SEC without admitting wrongdoing. In truth, the firm is in a real pickle.

In essence, Goldman's difficulties stem from two areas, only one of which is subject to the SEC civil suit. Firstly there is the matter of shorting a product you have sold a client (something the Senate hearings focused on last week). The problem here is that hardly anyone, including many people who work in the financial markets, understand the nuances here; how do you justify selling something to someone on the one hand, and then going out and 'betting' that it will fail the next minute ?

Sure, you can talk all you want about the functions of market making, hedging, and how it all works, but no-one, especially those outside the industry, cares. The fact is, it looks bad. It might be accepted practice, and it might not be illegal, but it has a bad smell about it. Goldman, it seems, is a target for the sins of the whole industry, which is tainted and an easy target due to the recent financial crisis.

Then there's the SEC fraud claim itself, which appears to come down to whether Goldman should have disclosed to clients that hedge fund manager Paulson & Co was the counterparty on a CDO deal which caused investors to lose around $1bn. The argument appears to be that had investors known it was Paulson betting against them, they may well have thought twice before entering the deal. But as many point out, Paulson & Co was a little known hedge fund in 2007, when this deal was struck (he has only since become an industry darling). So knowledge of Paulson's presence would likely have had no impact on the investors' decision to proceed with the trade anyway. 

The problem with all this, of course, that it's all technical stuff, all very arcane. And this stuff doesn't really play out well in the press, which is mostly interested in a sensational story which simply paints Goldman as the bad guys.

The dilemma facing the firm is a very difficult one - fight on and continue to be lambasted in the media, or attempt to settle and hope that the whole thing will quickly go away (but will it ?). And then there's fighting on and losing - something which could endanger the very existence of the firm itself. It's a right old mess, and Goldman appears well ensconced between that proverbial rock and a hard place.

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