In one of the largest penalties in Wall Street history, Goldman Sachs Group Inc. agreed to pay $550 million to settle civil charges that it duped clients by selling mortgage securities that were secretly designed by a hedge-fund firm to cash in on the housing market’s collapse.

But the agreement with the Securities and Exchange Commission ends a showdown that had deeply shaken America’s most powerful financial firm at a cost that outside observers deemed a bargain.

Goldman conceded it made “a mistake” by not disclosing the role of Paulson & Co. to investors for a deal dubbed Abacus 2007-AC1. The firm vowed to toughen oversight of mortgage securities, certain marketing materials and employees who create or pitch such securities.

Criminal prosecutors still are looking into whether Goldman or its employees committed securities fraud in connection with its mortgage trading, according to people familiar with the matter. Goldman hasn’t commented on the criminal probe.

Yet Goldman walked away with several victories that raise questions about the strength of the SEC’s case. The company wasn’t forced to sacrifice any top executives, including Chief Executive Lloyd C. Blankfein, as some executives had feared. The changes it agreed to won’t weaken its profits or standing as Wall Street’s mightiest firm. The record-setting penalty is equivalent to just 14 days of profits at Goldman in the first quarter.

“That is a steal,” said Michael Driscoll, a visiting professor at Adelphi University and a senior managing director at firm Bear Stearns Cos. before that firm collapsed in 2007. Analysts had expected Goldman to pay at least $1 billion as part of the deal.

Goldman shares surged late in the day on expectation of a pact, and continued to rally in after-hours trading. The stock was up $6.16, or 4.4% to $145.22 in New York Stock Exchange trading in regular hours, and then another $7.13, or 4.9%, to $152.35 after hours.

The firm’s traders, investment bankers and other employees expressed relief that the three-month legal ordeal, which erased nearly $20 billion of the company’s stock-market value, was over. Executives believe the $550 million payment is tiny compared with the business Goldman could have lost if the case dragged on. Goldman brass told managers to make sure the reaction inside the firm was subdued, fearing that cheering or other celebration would further taint the firm’s reputation.

The settlement must be approved by U.S. District Judge Barbara S. Jones in New York.

The SEC said the Goldman settlement represents the largest penalty it has ever extracted from a Wall Street firm. In 1988, Drexel Burnham Lambert Inc. agreed to pay $650 million in fines and restitution, but about half the total went to satisfy civil claims of investors and clients defrauded by Drexel.

(Source: WSJ)