It’s Good to be Connected: Goldman Sachs’ Miniscule CFTC Fine Is A Joke

Last week, the U.S. Commodity Futures Trading Commission (CFTC) slapped Goldman Sachs (NYSE:GS) with a $1.5 million fine over inadequate control measures in its trading system which allowed an employee to falsify trades worth $8.3 billion in 2007. (CFTC Orders Goldman, Sachs & Co., a Commission Registrant, to Pay $1.5 Million for Supervision Failures, CFTC Press Releases, Dec 7 2012)) Goldman lost $118 million in the process of unwinding the positions.

We believe the global investment bank has been lucky on both fronts: while the fine amount in itself is too small to be material to the bank, the loss from the position is but a fraction of what the bank could have potentially lost. After all, we have witnessed the damage that wrong multi-billion dollar trading decisions by a single individual can do to a bank’s reputation and business on two distinct occasions in the recent past – the unauthorized trading incident at UBS (NYSE:UBS) last year (see Questionable Risk Controls Cost UBS More than Rogue Trades) and the hedging portfolio loss at JPMorgan (NYSE:JPM) this June (see JPMorgan’s Trading Losses Could Climb, Sold Profitable Securities To Cushion Impact).

We maintain a $127 price estimate for Goldman’s stock, which is about 5% above the current market price.

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