So the draft final judgement has been prepared, Goldman’s consent has been signed and the press conference held. Time for a collective sigh of relief to put it all behind and move on. The light at the end of the tunnel has been switched on again – but be careful because those lights are glowing red.
What was predicted has come to pass. The institution has acknowledged that its marketing material was ‘incomplete,’ agreed to undertakings over the next three years to do things it could not possibly refuse to do as it should always have been doing them anyway. The SEC has $300m in fines in the bank and Deutsche Industriebank AG and the Royal Bank of Scotland N.V. will receive $150m and $100m respectively in compensation and the share price has recovered sufficiently for the fine not to cause too large a dent.
So the institution dusts itself off with a fine that is simply a cost of doing business in the area – nothing really changes and we can all get back to the serious business of making money. Whether you take the view that the SEC had a weak case because of industry practice in making its largest ever fine or whether what Goldmans did was wrong is to some extent immaterial – it is now unlikely that we will ever know the full extent of the story – but it is the outcome and its underlying message that is so serious.
Breaking rules or acting unethically do not result in large institutional businesses being closed down. The litigation is of course still not over but it is against an individual that is not going to put up a fight the way the institution would so Fabrice Tourre for now remains on the hook. There is something about that result which seems inherently unfair and unjust.
Those who enforce rules must be proportional in their actions but markers set by fines do not prevent large institutions from breaking rules in the pursuit of profits – many of these arise from failures of supervision but there is also little incentive because institutional memory can be notoriously short. The argument that is usually used is that reputations are tarnished by the imposition of these regulatory fines. Are they really? A brief review of the form ADV and the disclosures on regulatory actions of the large firms clearly demonstrate that these breaches are not unusual. The impact of regulatory action should be to prevent the recurrence of breaches by changing behaviour rather than simply imposing token punishment. The disclosures made on the form ADVs suggest that it is very much business as usual as the long list of disclosures on regulatory actions against firms to date should have tarnished these reputations irreparably.
Indeed if regulatory actions were a criteria for not doing business with firms it would not be possible to deal with most major firms. So if it is the intention of the SEC to set markers and change behaviour through its regulatory actions what is the real purpose of entering into these consent orders when regulatory breaches occur?
Is that reason enough to make a case for re-examining that light at the end of the tunnel?
©Jaitly LLP