Other Banks Could Pay Over Similar Housing Bets

Annemarie McAvoy in The Wall Street Journal, July 16, 2010

Read the full article on the WSJ site.


For the rest of Wall Street, the $550 million settlement between Goldman Sachs and the Securities and Exchange Commission means that the regulator could soon turn its attention on them.

"Now the target moves to somebody else," said Michael Mayo, an analyst at Calyon Securities who called Thursday's settlement a "win" for both Goldman and for the SEC, which brought the case.

"The SEC facilitated a new financial law" and "set a strong tone" by bringing the large fine and shedding light on the practices within Goldman's billion-dollar mortgage machine. By settling, Goldman "helps head off the falloff in customer activity that could have occurred if this were to drag on."

In a press conference Thursday, SEC enforcement chief Robert Khuzami said the agency was "looking at deals across a wide variety of institutions and circumstances." Many of the Goldman's practices that were targeted by the SEC were used by other big Wall Street firms.

Indeed, other banks such as Morgan Stanley, J.P Morgan Chase, Deutsche Bank, Bank of America and UBS are also under scrutiny from the SEC about the way they handled mortgage-related products. At issue are the obligations Wall Street firms had to their clients in giant bets made on the housing bubble. Some banks and other financial firms lost billions on the high-stakes housing wagers, leading to taxpayer-funded bailouts.

In the Goldman case and with others the SEC is looking at, one major question is whether investors betting against a mortgage product had an undisclosed influence in structuring the product itself.

Even though many of the investors who lost money were sophisticated, that doesn't excuse a lack of disclosure, the SEC said Thursday.

"This should put Wall Street on notice that the price for deception has gone up," said Denise Voigt Crawford, president of the North American Securities Administrators Association Inc. and the securities commissioner in Texas.

At other Wall Street firms, much of the attention was focused on the size of the fine, with several people saying that it was smaller than had been expected. Many people on Wall Street were predicting a fine for Goldman of $1 billion.

Regardless of the Goldman number, more banks are likely to settle cases in coming months over their practices in the mortgage market, experts say. "No one wants to be dragged out into the spotlight" like Goldman was, says Annemarie McAvoy, a law professor at Fordham University and former prosecutor. "The most likely scenario is more settlements."

Goldman shares fell sharply when the case was filed in April, but spiked in late trading Thursday, which could encourage more settlements. "If this is the framework for future settlements, I think most major players could get past it," said Jeff Harte, an analyst with Sandler O'Neill.

A lawyer who represents Wall Street firms said the settlement is likely to increase the disclosure offered by banks on complicated products.
—Robin Sidel contributed
to this article.