The Not-So Nuclear Deterrent
Under the old driving regulations in Ireland there was no ‘points’ system for speeding related offences – it was a purely financial based fines system. In old money, pre-Euro, it was around £30 punts, and latterly 50 euros for anything but obscene speeding offences. No wonder Ireland has had one of the worst records in Europe for driving accidents (although that record has improved in recent years along with the introduction of a points system).
Back in the late 1990s, our university golf team used to travel throughout Ireland playing matches against local clubs and so the odd speeding fine was picked up – once even by yours truly. Surprising, not least because I didn’t think the clapped out Ford Fiesta I was driving had the ability to pass the 70mph mark. I think I must have been going down a very large hill. I hasten to add that once was enough as £30 would have covered a fair amount of my monthly budget. In my case, it was a sufficient sum to act as a deterrent.
On the flip side, one of the members of the golf team was a mature student who in his own understated way had “made a few quid” out of a technology company he had set-up and sold before the dot.com boom imploded. He drove an Alfa Romeo and a seat in his car on the way to golf matches was a prized position – you travelled in style and got to your destination quickly; very quickly at times. In one journey to Lahinch on the west coast he was stopped three times for speeding. I sat in the front passenger seat on this journey and handed him his cheque book from the glove compartment each time for him to pay his fine direct to the Garda (police officer) who had stopped him. Five minutes later he was back cruising along at Mach 1, truly undeterred.
Fines act as deterrents to different people in different ways, but what was clear was that the Irish driving system didn’t work for our flush friend.
I was reminded of this tale this week while reading about the SEC settlement in its fraud suit against Goldman Sachs, relating to the creation and distribution of the Abacus transaction. The settlement ($550 million) marks the steepest penalty ever doled out by the regulator against a Wall Street institution. As the FT pointed out, the settlement may as well have been for $550 – if past performance is anything to go by Goldman’s trading desks will have made up the half billion dollars by the end of next week. For them it is the equivalent of opening the glove compartment, taking the cheque book out and writing a quick, relatively painless cheque to the market’s equivalent of the Garda.
While this may sound cynical, it is to be expected: $550mm is equivalent to 1.2% of Goldman’s 2009 revenues – or 3 days worth of revenues. Alternatively, it’s 3.4% of its annual compensation bill; that’s a $34,000 reduction per $1,000,000 bonus payout, which isn’t exactly going to throw you off your stride. For further context:
1) The fiscal 2010 federal deficit in the US is currently projected at roughly $1.2 trillion. Goldman’s $300 million will lower it by only about 1/25th of one percent.
2) The UK treasury took in twice the amount — £600 million — by imposing a bonus tax.
3) The funding gap in the UK’s public sector pensions is estimated at around £1.2 trillion. The $100mm (roughly £65mm) the mostly state owned RBS will receive in this settlement is 0.0000065% of this figure.
In this particular case, however, the funds will be distributed between the so-called “victims” – a German bank called IKB and the Royal Bank of Scotland, who assumed an $850mm position in the Abacus transaction when it acquired ABN Amro. Both of these self confessed ‘professional’ investors showed an unhealthy level of incompetence in both this transaction and in the other activities in the run-up to the credit crunch. It’s hard to believe that they deserve the $550mm worth of funds from Goldman more than the US or European taxpayer. Anyway, that’s another story in the ever increasing moral hazard saga of this financial crisis.
This penalty is symbolic, and it mainly appears to show the weakness of the SEC’s legal case – which is different from it’s ethical case. As with the financial regulation bill in the US, the financial services sector was braced for something truly painful, and should now feel mightily relieved, which is a case of a regulatory opportunity missed.
That said, the SEC will also try to make examples of other banks – it needs to justify all the hiring for its new ’structured and new products’ unit. Banks are still risky and will be fined for the same practices, but insufficiently so to make any great difference to operating practices. It will be the equivalent of stopping the Alfa Romeo for 10 minutes to pull the cheque book out of the glove compartment. Plus ça change, plus c’est la même chose.
