Wall Street’s Wrist Slap

Last Friday afternoon, John Whitehead, the 88-year-old former Goldman Sachs co-chairman, was relaxing in Rhode Island. He felt relieved. One day earlier, his old firm had settled the S.E.C.’s landmark fraud charges for $550 million. Goldman did not have to admit wrongdoing, only that a mistake was made. “It’s a lesser number than I feared, and that other people seem to have feared, so I was pleased,” he said. “I think the attacks on Wall Street firms, I hope, are probably over. Good news for all, for everybody, for the public. Further attacks were going to drive an important industry out.”

It’s good for his successors, too. “Well, I think it exonerates them as being bad guys,” Mr. Whitehead said. “That’s what they deserve. They’re good people.”

The past few days, which should have been unmemorable except for the unmoving mid-summer heat, have somehow made for a storybook Wall Street denouement. Just before noon on Thursday, the Senate voted to end debate on its financial reform bill, getting exactly the 60 votes needed. At 2:25, when the final valves were tightened around a new cap on BP’s oil well in the Gulf of Mexico, oil stopped streaming for the first time since April’s explosion. Within an hour, the Senate had voted to pass its final financial reform bill, which, as The Washington Post relayed, didn’t seem to profoundly change the shape of Wall Street. “It’s the dumbest argument I’ve ever heard,” Senator Chris Dodd answered.

‘I was sort of embarrassed, as an American,’ Paul Atkins, an S.E.C. commissioner from 2002 to 2008, said from the mountains in Colorado.

An hour and a half later, at 4:45, standing in a yellow tie behind a podium in the basement of the S.E.C.’s headquarters, director of enforcement Robert Khuzami announced the Goldman settlement. “More than a half-billion dollars,” he said. “More than a half-billion dollars,” he said again.

The next day, a global head of communications for a major U.S. bank was sitting in New York, unimpressed. “Five hundred fifty million with no management changes and no admitting charges, and that’s their first and biggest case? That just puts an upper limit on any regulatory pain,” the executive said.

Mary Schapiro, the S.E.C. chairwoman, told Congress Tuesday that the bulk of her cases haven’t necessarily been brought to light yet-but still. “You have the cap of the regulatory danger and all that crap, and you have the calmness on fin-reg getting done,” the executive said. “Politicians don’t have to throw darts at banks, so you’re not the punching bag anymore. Everyone’s just going to go on vacation. I’ve never felt so calm. Literally, it started an hour ago. You’re going to find a very quiet month, probably after next week, and then I think you’ll have a very chill late July and all of August.”

“I’m jumping up and down and telling my dad to buy,” the former CFO of Lehman Brothers, Brad Hintz, who now analyzes Goldman for Sanford C. Bernstein & Co., told Bloomberg. “That is a steal,” Michael Driscoll, the former Bear Stearns senior managing director, and now a professor, told The Journal. In The Times, in the middle of an op-ed contribution, banker Roger C. Altman casually mentioned that while some of his Wall Street colleagues don’t like financial regulation, “most in our community view it as relatively harmless.”

And so Wall Street’s terrifying climax passed painlessly. The past seven days have been almost calm, except for some banks’ disappointing second-quarter results-although several weren’t as bad as forecast. And besides, Bank of America, JPMorgan and Wells Fargo now have a third of all American bank deposits, up from just over a fifth three years ago, reportedly the quickest growth in the history of American banking.


“THE PRODUCT WAS new and complex but the deception and conflicts are old and simple,” Mr. Khuzami said back in April, when the S.E.C. sued Goldman over a soured mortgage deal called 2007-AC1. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”

Around town this week, there were different ways to think about that suit’s settlement. On the one hand, even though the sum is what Goldman makes every few weeks, and the writer Daniel Gross says that Michael Milken’s fine during the junk bond era was bigger when adjusted for inflation, you could be thrilled by that sum’s enormity. A big punishment for a big mistake!

But not all S.E.C. types feel that way. Jacob Frankel, a former senior counsel at the commission, said he thought the case had been weak. “The S.E.C. has regulations that talk about what needs to be disclosed,” he said. “And it was not clear that the facts that needed to be disclosed were material.” Still, he said that the suit’s boldness showed that Mr. Khuzami’s new regime has resolve and nerve.

“I was sort of embarrassed, as an American,” Paul Atkins, an S.E.C. commissioner from 2002 to 2008, said from the mountains in Colorado. “It’s basically playing for headlines with very little substance, and so I think it really raises questions about the enforcement program as a whole, how it’s been led and developed.”

He said that Goldman had no choice but to settle, so the settlement didn’t necessarily reflect well on regulators. “Usually one leads with your strongest case. If this is the strongest case,” he said, “then I don’t know what to say.”

Then there was the problem of timing. The S.E.C. sued Goldman the week that the Senate was scheduled to start debating the financial regulation bill, which passed the afternoon the settlement was announced. “The one thing I can say is that the timing was so close that it’s almost one of those things where it has to be a coincidence,” said Bank of America analyst Guy Moszkowski, who changed his rating on Goldman to a buy. Late last month, he co-wrote a Bank of America Merrill Lynch Global Research report called “Financial Overhaul: Could’ve Been Worse.”

“I think most of the people in the industry are coming to terms with it, and saying, you know what, it’s manageable,” Mr. Moszkowski said. On the other hand, he pointed out that his own bank’s executives said on a Friday earnings call that regulation could cost the firm $10 billion. By Monday, the consensus was that Bank of America had exaggerated.

mabelson@observer.com Wall Street’s Wrist Slap