Goldman Sachs Fraud Case Settlement Q&A

(July 16) -- Here's the lowdown on the biggest fine ever handed to a bank -- $550 million against Goldman Sachs -- by finance watchdog the Securities and Exchange Commission:

What Did Goldman Do Wrong?
In April, the SEC charged Goldman with failing to disclose "vital information" when it marketed bundled subprime mortgage investments -- packaged into a vehicle called Abacus -- in 2007. The regulator said the bank should have told buyers the securities had been handpicked by one of the world's largest hedge funds, Paulson & Co, which was betting that the value of the bundle would fall. When the U.S. housing market collapsed, Abacus investors lost more than $1 billion.

In a statement, the SEC said Goldman had acknowledged that its marketing material contained "incomplete information." Goldman conceded that it had been a "mistake" not to disclose Paulson's role and said that it "regrets that the marketing materials did not contain that disclosure." The company, however, did not admit any legal wrongdoing.

Who Gets the Money?
Britain's Royal Bank of Scotland, which lost about $840 million in Abacus, will receive $100 million in compensation. German bank IKB Deutsche Industriebank gets $150 million -- the same amount it invested -- with the final $300 million going to the U.S. Treasury.

The settlement still has to be approved by a federal judge.

Does the Fine Hurt Goldman?
Not really. The $550 million penalty may sound heavy, but it's worth only 1 percent of Goldman's net revenues last year ($45.2 billion), 3.4 percent of staff bonuses and salaries, or 15 percent of its profits in the first three months of this year.

And because many analysts had predicted that Goldman would be hit with a heavier penalty of at least $1 billion, the company's stock actually went up 4.5 percent after news of the relatively light penalty leaked Thursday. "They pay $550 million and they get an $800 million pop in their stock price ... they got off easy," said Kevin Caron, a market strategist at New Jersey-based investment firm Stifel, Nicolaus & Co.

Is This the End of Goldman's Legal Woes?
It's not in the clear yet. Although Goldman said in a statement that it understood the SEC didn't intend to bring any new cases, the watchdog is continuing its ongoing investigation of collateralized debt obligations, like Abacus, issued by Goldman and other banks, and could still decide to take action.

The Justice Department is also carrying out its own criminal probe into the behavior of Goldman employees, and the company faces several private lawsuits connected to mortgage bundles and last year's decision to delay telling shareholders that it had received formal notice the SEC was looking into Abacus.