News outlets, New York Times, Bloomberg, etc., are reporting that Goldman Sachs is under criminal investigation by the US Attorney for mortgage trading fraud. Goldman's shares dropped over 9 percent today on the news and about 25 percent since its peak about 6 months ago and prior to the SEC's announcement of its investigation into the ACA Paulson Abacus deal.
It is not at all surprising that the SEC referred the Goldman case for criminal review. The SEC often refers civil cases to the Justice Department for criminal review and it is not at all surprising that the SEC referred this high visibility case with populist appeal to the US Attorney for criminal review. It makes the SEC's case look stronger and criminal charges would make it easier to settle the case with Goldman.
Goldman's risk of losing to the government on the criminal or civil case is not high. Many SEC criminal referrals quietly disappear without charges against the firms. Goldman's greatest risks right now are its reputation and lost business.
My impression is that the price drop in its shares is not due to fact that Goldman is under criminal investigation. A criminal referral is expected. The share price dropped because the information is now in the public media.
The government does not announce criminal investigations and waits until an indictment to issue a press release. The government appears to have leaked the information about the investigation directly to the press or to parties with contacts with the press as a strategy to win this case.
Many entities will not do business with a firm under possible criminal indictment and the news stories will make many entities aware of the criminal investigations and make it harder for them to avoid acting upon the news and stop doing business with Goldman.
It appears the government is using reputation risk, lost business, and an Arthur Anderson scenario to pressure Goldman to settle with the SEC and admit guilt.
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