The Goldman Settlement, A Split Commission, and an Embarrassed Dissent

The WSJ has reported that the Goldman settlement was approved by a 3-2 vote, with Commissioners Casey and Paredes dissenting.  The reasons?

• People familiar with the matter say Republican Commissioner Kathleen Casey questioned the SEC staff Thursday on their decision to abandon the strongest fraud charge and strike a settlement involving a lesser allegation, and given that, how the SEC could justify such a large penalty on a lesser charge.

Her complaint about the penalty is no big surprise.  It should be remembered that Commissioner Casey was one of the commissioners responsible for the policy during the Cox era that utterly hobbled the Division of Enforcement by requiring pre-approval of penalties imposed on issuers.  She's opposed to them but fortunately that era has passed.  

The negative vote is no great surprise for another reason.  Commissioners Casey and Paredes opposed the case from the very beginning, essentially arguing that it lacked merit.  Had the Commission been handed its head in litigation, they could have uttered a conclusive "I told you so."  Instead, the Commission has won a rich settlement, extracting a half a billion dollar penalty in the process.  Their prior position and characterization now looks embarrassingly wrong.  So does the continued opposition.    

So, in this context, its not accurate, as the WSJ writes, to contend that the "dispute also raises fresh questions about how strong a case the SEC had against Goldman."  It reflects the views of two Commissioners who have a deregulatory philosophy that was emphatically rejected with the adoption of FinReg by the Senate.  It does not reflect on the merits of the case.  

The problem is, thankfully, a temporal one.  Commissioner Casey's term expires in 2011, leaving Commissioner Paredes very isolated until the expiration of his term in 2013 (although its not uncommon for commissioners to resign before a term is completed).   The Commission cannot have more than three persons of the same party but the Chair, Mary Schapiro is typically labeled an independent so that means when Casey resigns, there is room for a third Democrat. 

Even if the appointment goes to a Republican (something the Senate minority might try to force), it will at least have to be a Republican that President Obama is willing to nominate.  Suffice it to say that someone with the views of commissioners Casey and Paredes will not qualify.

Comments

[A casual reader]

And yet we are asked to believe that enforcement is not political?

[Shap]

Why does the settlement make "[t]heir prior position and characterization now look[...] embarrassingly wrong"? How does the settlement show that the SEC's case had serious merit? There are many reasons for Goldman to settle other than that they thought they might lose the litigation--client distrust and reduced share value due to the 'dirty laundry' effect being the foremost.

In fact, Casey and Paredes were more right than wrong. This was a politically orchestrated strike suit to buttress "financial reform."