<TABLE border=0 cellSpacing=0 cellPadding=0 width=452><TBODY><TR vAlign=top><TD></TD></TR><TR><TD vAlign=top width=452 colSpan=2>Published April 19, 2010
</TD></TR><TR><TD vAlign=top width=452 colSpan=2>FOCUS: GOLDMAN SACHS SUIT
</TD></TR><TR><TD vAlign=top width=452 colSpan=2>High stakes in small Goldman deal
SEC's lawsuit could unleash dozens of investor claims against Wall St titans that devised and sold toxic mortgage investments
(NEW YORK) FOR Goldman Sachs, it was a relatively small transaction. But for the bank - and the rest of Wall Street - the stakes couldn't be higher. Accusations that Goldman defrauded customers who bought investments tied to risky sub-prime mortgages have only just begun to reverberate through the financial world.
<TABLE class=picBoxL cellSpacing=2 width=100 align=left><TBODY><TR><TD>
</TD></TR><TR class=caption><TD>Centre of storm: As debate rages among policy makers over a sweeping overhaul of US financial regulations, SEC's lawsuit could embolden those seeking to rein in the banks </TD></TR></TBODY></TABLE>The civil lawsuit filed against Goldman on Friday by the Securities and Exchange Commission seemed to confirm many Americans' worst suspicions about Wall Street: that the game is rigged, the odds stacked in the banks' favour. It is the first big case - but probably not the last, legal experts said - to delve into a Wall Street firm's role in the mortgage fiasco.
It is a particularly sensitive time for Wall Street. Washington policy makers are hotly debating a sweeping overhaul of the nation's financial regulations, and the news could embolden those seeking to rein in the banks. President Barack Obama on Saturday stepped up pressure for financial reform by accusing Republicans of 'cynical and deceptive' attacks on the measure.
The SEC's action could also hit Wall Street where it really hurts: the wallet. It could prompt dozens of investor claims against Goldman and other Wall Street titans that devised and sold toxic mortgage investments.
In Europe yesterday, Britain and Germany called for a probe of Goldman Sachs.
<TABLE border=0 cellSpacing=0 cellPadding=5 align=left><TBODY><TR><TD bgColor=#ffffff>[FONT=Geneva, Helvetica, Verdana, Arial, sans-serif]<!-- REPLACE EVERYTHING IN CAPITALS WITH YOUR OWN VALUES --><TABLE class=quoteBox border=0 cellSpacing=0 cellPadding=0 width=144 align=left><TBODY><TR><TD vAlign=bottom>
</TD></TR><TR><TD bgColor=#fffff1><TABLE border=0 cellSpacing=0 cellPadding=0 width=124 align=center><TBODY><TR><TD vAlign=top>Goldman's stock took a beating on Friday, falling 13% and wiping out more than US$10 billion of the company's market value.
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</TD></TR></TBODY></TABLE></TD></TR></TBODY></TABLE>UK Prime Minister Gordon Brown said he wants the Financial Services Authority to open an inquiry, declaring he was 'shocked' at 'moral bankruptcy' indicated in the suit. The German financial regulator, Bafin, asked the SEC for details on the suit, a spokesman for Chancellor Angela Merkel said.
Goldman - whose controversial success has leapt from the financial pages to the cover of Rolling Stone - has fiercely defended its actions before, during and after the financial crisis. On Friday, it called the SEC's accusations 'unfounded.' Wall Street played a complex and, at times, seemingly conflicted role in the mortgage meltdown.
Goldman and others worked behind the scenes, bundling home loans into investments for sale to investors the world over. Even now, more than 18 months after Washington rescued the teetering financial system, no one knows for sure how much money was lost on those investments.
The public outcry against the bank bailouts was driven in part by suspicions that a heads-we-win, tails-you-lose ethos pervades the financial industry. To many, that Goldman and others are once again minting money - and paying big bonuses to their employees - is evidence that Wall Street got a sweet deal at taxpayers' expense. The accusations against Goldman may only further those suspicions.
'The SEC suit against Goldman, if proven true, will confirm to people their suspicions about the total selfishness of these financial institutions,' said Steve Fraser, a Wall Street historian and author of Wall Street: America's Dream Palace. 'There's nothing more damaging than that. This is way beyond recklessness. This is way beyond incompetence. This is cynical, selfish exploiting.'
On Friday, Goldman's stock took a beating, falling 13 per cent and wiping out more than US$10 billion of the company's market value. It was a possible sign that investors fear that the SEC complaint will damage Goldman's reputation and its ability to keep its hands on so many sides of a trade - a practice that is immensely profitable for the firm.
It is unclear whether the SEC can prevail against Goldman. The bank has long maintained that it puts its clients first and, in a letter in its latest annual report, reiterated that position. Goldman said that it never 'bet against our clients' in its trades but rather was trying to hedge against other trading positions.
The transaction cited in the SEC complaint cost investors just over US$1 billion, relatively small by Wall Street standards.
Still, Wall Street analysts said Goldman and other banks, having navigated the financial crisis, might now face a new kind of risk: angry investors. Most major Wall Street banks also created collateralised debt obligations, which are at the heart of the Goldman case. CDOs, which are essentially bundles of securities backed by mortgages or other debt securities, turned out to be among the most toxic investments ever devised.
'Any investor who bought these CDOs and lost a significant amount of money is probably looking at their investment and wanting to know: what were the details behind the sale?' said William Tanona, an analyst at Collins Stewart. 'Will they contact the SEC and say, 'Here's the transaction we participated in, and we'd love to know who is on the other side of it?'
The biggest victim among investors, the SEC complaint said, was the Royal Bank of Scotland, which inherited a loss of US$841 million after it took over the Dutch bank ABN Amro. According to a person briefed on the matter, Royal Bank, now controlled by the British government, is studying the documents but is not yet ready to decide whether to take action to recoup money from Goldman.
The German bank IKB Deutsche Industriebank, as well as the German government, which in 2007 put up billions to prevent IKB from collapsing, still seemed to be sorting out who might have legal standing to pursue a possible claim.
Goldman faces a dilemma in its response. Wall Street firms tend to settle cases like this one, but Goldman's statement on Friday indicated it intended to dig in its heels and fight, perhaps in part to discourage suits by investors. But that strategy could set it up for a drawn-out, messy and public battle.
The SEC complaint named just one Goldman employee: Fabrice Tourre, a vice-president in the bank's mortgage operation who worked on the questionable transaction.
But securities lawyers say Mr Tourre appears to be a small fish.
Federal investigators may try to gain his cooperation and extend their investigation to other Goldman employees. On Friday, Mr Tourre's lawyer did not provide a comment on the complaint.
A big question is how far up this might go. The SEC said the deal in its complaint had been approved by a committee at Goldman called the Mortgage Capital Committee.
'It's typical that they'd start with someone lower down on the chain and try to exert pressure on that person,' said Bradley Simon of Simon & Partners, a white-collar defence lawyer in New York. 'Is it really conceivable that no one else was involved in this?' As the housing market began to fracture in 2007, senior Goldman executives began overseeing the mortgage department closely, according to four former Goldman Sachs employees, who spoke on the condition of anonymity because of the sensitivity of the matter.
Senior executives routinely visited the unit. Among them were David Viniar, the chief financial officer; Gary Cohn, the president; and Pablo Salame, a sales and trading executive, these former employees said. Even Goldman's chief executive, Lloyd Blankfein, got involved.
Top executives met routinely with Dan Sparks, the head of the mortgage trading unit, who retired in the spring of 2008. Managers instructed several traders to sell housing-related investments.
Indeed, they urged Mr Tourre and a colleague, Jonathan Egol, to place more bets against mortgage investments, the former employees said.
A Goldman spokesman said on Saturday that the top executives were not involved in the approval process for Abacus, the deal cited by the SEC, and that their involvement with the mortgage department in 2007 was related to their desire to counterbalance the positive bets on housing the banks had already made.
Mr Blankfein has already been questioned by a congressional commission about the toxic vehicles Goldman devised and sold, even as the bank realised the housing market was in trouble.
Recent public statements made by Mr Blankfein seem to conflict with the account laid out by the SEC.
In testimony in January before the Financial Crisis Inquiry Commission, the panel appointed by Congress to examine the causes of the crisis, for example, he described Goldman's approach to dealing with its clients: 'Of course, we have an obligation to fully disclose what an instrument is and to be honest in our dealings, but we are not managing somebody else's money.'
But the SEC complaint says Goldman misled investors who bought one of the bank's Abacus deals. The bank failed to tell them that the mortgage bonds underpinning the investment had been selected by a prominent hedge fund manager who wanted to bet against the investment, the SEC says. Those bonds were especially vulnerable, the commission says. -- NYT, Bloomberg
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</TD></TR><TR><TD vAlign=top width=452 colSpan=2>FOCUS: GOLDMAN SACHS SUIT
</TD></TR><TR><TD vAlign=top width=452 colSpan=2>High stakes in small Goldman deal
SEC's lawsuit could unleash dozens of investor claims against Wall St titans that devised and sold toxic mortgage investments
(NEW YORK) FOR Goldman Sachs, it was a relatively small transaction. But for the bank - and the rest of Wall Street - the stakes couldn't be higher. Accusations that Goldman defrauded customers who bought investments tied to risky sub-prime mortgages have only just begun to reverberate through the financial world.
<TABLE class=picBoxL cellSpacing=2 width=100 align=left><TBODY><TR><TD>
</TD></TR><TR class=caption><TD>Centre of storm: As debate rages among policy makers over a sweeping overhaul of US financial regulations, SEC's lawsuit could embolden those seeking to rein in the banks </TD></TR></TBODY></TABLE>The civil lawsuit filed against Goldman on Friday by the Securities and Exchange Commission seemed to confirm many Americans' worst suspicions about Wall Street: that the game is rigged, the odds stacked in the banks' favour. It is the first big case - but probably not the last, legal experts said - to delve into a Wall Street firm's role in the mortgage fiasco. It is a particularly sensitive time for Wall Street. Washington policy makers are hotly debating a sweeping overhaul of the nation's financial regulations, and the news could embolden those seeking to rein in the banks. President Barack Obama on Saturday stepped up pressure for financial reform by accusing Republicans of 'cynical and deceptive' attacks on the measure.
The SEC's action could also hit Wall Street where it really hurts: the wallet. It could prompt dozens of investor claims against Goldman and other Wall Street titans that devised and sold toxic mortgage investments.
In Europe yesterday, Britain and Germany called for a probe of Goldman Sachs.
<TABLE border=0 cellSpacing=0 cellPadding=5 align=left><TBODY><TR><TD bgColor=#ffffff>[FONT=Geneva, Helvetica, Verdana, Arial, sans-serif]<!-- REPLACE EVERYTHING IN CAPITALS WITH YOUR OWN VALUES --><TABLE class=quoteBox border=0 cellSpacing=0 cellPadding=0 width=144 align=left><TBODY><TR><TD vAlign=bottom>
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Goldman - whose controversial success has leapt from the financial pages to the cover of Rolling Stone - has fiercely defended its actions before, during and after the financial crisis. On Friday, it called the SEC's accusations 'unfounded.' Wall Street played a complex and, at times, seemingly conflicted role in the mortgage meltdown.
Goldman and others worked behind the scenes, bundling home loans into investments for sale to investors the world over. Even now, more than 18 months after Washington rescued the teetering financial system, no one knows for sure how much money was lost on those investments.
The public outcry against the bank bailouts was driven in part by suspicions that a heads-we-win, tails-you-lose ethos pervades the financial industry. To many, that Goldman and others are once again minting money - and paying big bonuses to their employees - is evidence that Wall Street got a sweet deal at taxpayers' expense. The accusations against Goldman may only further those suspicions.
'The SEC suit against Goldman, if proven true, will confirm to people their suspicions about the total selfishness of these financial institutions,' said Steve Fraser, a Wall Street historian and author of Wall Street: America's Dream Palace. 'There's nothing more damaging than that. This is way beyond recklessness. This is way beyond incompetence. This is cynical, selfish exploiting.'
On Friday, Goldman's stock took a beating, falling 13 per cent and wiping out more than US$10 billion of the company's market value. It was a possible sign that investors fear that the SEC complaint will damage Goldman's reputation and its ability to keep its hands on so many sides of a trade - a practice that is immensely profitable for the firm.
It is unclear whether the SEC can prevail against Goldman. The bank has long maintained that it puts its clients first and, in a letter in its latest annual report, reiterated that position. Goldman said that it never 'bet against our clients' in its trades but rather was trying to hedge against other trading positions.
The transaction cited in the SEC complaint cost investors just over US$1 billion, relatively small by Wall Street standards.
Still, Wall Street analysts said Goldman and other banks, having navigated the financial crisis, might now face a new kind of risk: angry investors. Most major Wall Street banks also created collateralised debt obligations, which are at the heart of the Goldman case. CDOs, which are essentially bundles of securities backed by mortgages or other debt securities, turned out to be among the most toxic investments ever devised.
'Any investor who bought these CDOs and lost a significant amount of money is probably looking at their investment and wanting to know: what were the details behind the sale?' said William Tanona, an analyst at Collins Stewart. 'Will they contact the SEC and say, 'Here's the transaction we participated in, and we'd love to know who is on the other side of it?'
The biggest victim among investors, the SEC complaint said, was the Royal Bank of Scotland, which inherited a loss of US$841 million after it took over the Dutch bank ABN Amro. According to a person briefed on the matter, Royal Bank, now controlled by the British government, is studying the documents but is not yet ready to decide whether to take action to recoup money from Goldman.
The German bank IKB Deutsche Industriebank, as well as the German government, which in 2007 put up billions to prevent IKB from collapsing, still seemed to be sorting out who might have legal standing to pursue a possible claim.
Goldman faces a dilemma in its response. Wall Street firms tend to settle cases like this one, but Goldman's statement on Friday indicated it intended to dig in its heels and fight, perhaps in part to discourage suits by investors. But that strategy could set it up for a drawn-out, messy and public battle.
The SEC complaint named just one Goldman employee: Fabrice Tourre, a vice-president in the bank's mortgage operation who worked on the questionable transaction.
But securities lawyers say Mr Tourre appears to be a small fish.
Federal investigators may try to gain his cooperation and extend their investigation to other Goldman employees. On Friday, Mr Tourre's lawyer did not provide a comment on the complaint.
A big question is how far up this might go. The SEC said the deal in its complaint had been approved by a committee at Goldman called the Mortgage Capital Committee.
'It's typical that they'd start with someone lower down on the chain and try to exert pressure on that person,' said Bradley Simon of Simon & Partners, a white-collar defence lawyer in New York. 'Is it really conceivable that no one else was involved in this?' As the housing market began to fracture in 2007, senior Goldman executives began overseeing the mortgage department closely, according to four former Goldman Sachs employees, who spoke on the condition of anonymity because of the sensitivity of the matter.
Senior executives routinely visited the unit. Among them were David Viniar, the chief financial officer; Gary Cohn, the president; and Pablo Salame, a sales and trading executive, these former employees said. Even Goldman's chief executive, Lloyd Blankfein, got involved.
Top executives met routinely with Dan Sparks, the head of the mortgage trading unit, who retired in the spring of 2008. Managers instructed several traders to sell housing-related investments.
Indeed, they urged Mr Tourre and a colleague, Jonathan Egol, to place more bets against mortgage investments, the former employees said.
A Goldman spokesman said on Saturday that the top executives were not involved in the approval process for Abacus, the deal cited by the SEC, and that their involvement with the mortgage department in 2007 was related to their desire to counterbalance the positive bets on housing the banks had already made.
Mr Blankfein has already been questioned by a congressional commission about the toxic vehicles Goldman devised and sold, even as the bank realised the housing market was in trouble.
Recent public statements made by Mr Blankfein seem to conflict with the account laid out by the SEC.
In testimony in January before the Financial Crisis Inquiry Commission, the panel appointed by Congress to examine the causes of the crisis, for example, he described Goldman's approach to dealing with its clients: 'Of course, we have an obligation to fully disclose what an instrument is and to be honest in our dealings, but we are not managing somebody else's money.'
But the SEC complaint says Goldman misled investors who bought one of the bank's Abacus deals. The bank failed to tell them that the mortgage bonds underpinning the investment had been selected by a prominent hedge fund manager who wanted to bet against the investment, the SEC says. Those bonds were especially vulnerable, the commission says. -- NYT, Bloomberg
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