The minus 950 penalty [webmasterworld.com] was the first of many over-optimization efforts from Google, back in 2007. Matt Cutts once described it something like this: If you're the kind of webmaster who hangs out at SEO forums and does everything you read about, this penalty might affect you.
Here's the way things seem to be with Google today. The things that we webmasters can control directly only take us part of the way. If we only try to "do SEO" - creating all the technical signals that we've heard about over and over, and we do that for a site without also directly addressing things like content quality, user experience etc - then at some point we cross the line and lose the benefit of the technical signals that we originally tried to send.
Here's the way I see it: most Google users don't care which website does the best SEO. They just want a really good answer for their search query, and that's the way I see Google aiming. They don't always hit their intended target, that's for sure, but they are getting better at it.