Goldman Sachs agreed to a $550 million dollar fine from the SEC yesterday in a civil suit over a package of mortgage-backed securities designed by a hedge fund which was shorting the housing market. It’s both the largest SEC fine against a financial company in history and nothing more than a bug to Goldman Sachs. Because their market capitalization increased by $2 billion once the Street found out about the settlement. So even yesterday, even with this fine, Goldman made money.

I would have hoped that the firm’s reputation would take a hit from this:

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.

But nobody at the Justice Department is talking about the criminal investigation, at least not now. And Goldman didn’t have to fire one top executive, nor did they lose any standing on Wall Street, as yesterday’s showing in the stock market proved.

This is the problem with bank size. You can accurately describe this settlement as the largest fine in SEC history and “a steal” for Goldman Sachs, which Michael Driscoll, a former senior managing director at Bear Stearns, told the Wall Street Journal. It’s not just that these firms are too big to fail, they’re too big to hurt, at least from a regulatory aspect. If the case dragged on, if we reached a discovery phase or key facts about how Goldman operates came out, maybe the aura would have been punctured and they would have been exposed as frauds. But this settlement nullifies any of that. Given that, Goldman probably would have happily agreed to twice the fine, as long as the case stayed away from public scrutiny.

And now the marker has been laid down for accountability during the financial meltdown. The government might take a chunk out of you, but it will grow back. What Goldman Sachs and other banks get in cheap money from the Federal Reserve discount window more than makes up for a fine of this size. When you cannot exact a satisfactory price for risk, and you’re unwilling to send Wall Street criminals to jail, you tie your hands as regulators and invite the worst kind of speculative, greedy behavior.

This is an ominous lesson as the financial bill heads into the regulatory phase. Leaving Wall Street intact was a major mistake.

UPDATE: Matt Taibbi was on Democracy Now and made a few pretty important points. One is that Goldman Sachs lost about $25 billion in market value in the three months after the SEC lawsuit was announced, so that must be taken into account. Also, importantly, the fine is less than the money Goldman made on the deal, which is a crucial point. Wall Street titans are empowered to commit fraud in the marketplace, and know that the only result will be a fine less than the profit made off the fraud. Nobody will have to admit criminal wrongdoing and nobody will have to go to jail.