Goldman Settlement `Victory' Ushers Change to Wall Street

Christine Harper and Joshua Gallu - Jul 16, 2010

Goldman Sachs Group Inc.’s $550 million settlement with U.S. regulators yesterday will benefit the firm by ending three months of uncertainty at an affordable price. Now the rest of Wall Street begins calculating the cost.

Investors welcomed the deal with the Securities and Exchange Commission, saying the company won key points: The cost was below some analysts’ estimates of at least $1 billion; no management changes were required; and Goldman Sachs said the SEC indicated it doesn’t plan claims related to other mortgage- linked securities it examined. The stock’s late surge on anticipation of a settlement yesterday added more than $3 billion to the company’s market value, and it climbed further after New York trading closed.

“You’d have to look at it as a victory for Goldman,” said Peter Sorrentino, senior portfolio manager at Huntington Asset Advisors in Cincinnati, which manages $13.3 billion including Goldman Sachs shares. “This takes a cloud off the stock.”

In the settlement, unveiled less than two hours after the Senate passed legislation to reform the financial system and avert future crises, Goldman Sachs acknowledged that marketing materials for the 2007 deal at the center of the case contained “incomplete information.” In its April 16 suit, the SEC accused the firm of defrauding investors in a mortgage-backed collateralized debt obligation by failing to tell them that hedge fund Paulson & Co., which was planning to bet against the deal, had helped to design it.

‘One of the Worst Days’

In its original public response, Goldman Sachs had called the SEC’s case “unfounded in law and fact” and maintained that it made all disclosures about the CDOs that should be material to the “sophisticated” investors who lost money on the deal. Chairman and Chief Executive Officer Lloyd Blankfein, who said the day the suit was filed was “one of the worst days in my professional life,” said in May that the bank established a committee to review the firm’s business standards.

The settlement requires the New York-based company to increase training for employees who structure or market mortgage securities, and to bolster the vetting and approval process. Those changes will probably lead to a new industry standard for disclosures in private sales of securities, even to the most sophisticated investors, analysts said.

“All of the firms are going to adjust their internal standards for this,” Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York, said in an interview. The agreement means “a private placement doesn’t absolve you from the accuracy of the disclosure and you’d better have very, very good compliance watching what your sales people are saying.”

‘Best Practices’

Robert Khuzami, the SEC’s director of enforcement, said at a news conference yesterday that his agency means to send a signal to the entire industry.

“We would strongly encourage other institutions to adopt any kinds of best practices that they see across the street in order to prevent this kind of wrongdoing,” said Khuzami, 53. “The deterrence, and preventing a fraud before it occurs, is a much better outcome than picking up the pieces afterwards.”

The SEC is still investigating other companies and a range of products that fueled losses during the financial crisis, Khuzami said. Last month, the agency sued New York-based ICP Asset Management LLC on claims that it improperly traded assets in CDOs it managed. ICP has denied wrongdoing.

Goldman Sachs said in a statement that the SEC doesn’t plan to target the firm over any other products that the agency has reviewed.

Case Against Tourre

“We understand that the SEC staff also has completed a review of a number of other Goldman Sachs mortgage-related CDO transactions and does not anticipate recommending any claims against Goldman Sachs or any of its employees,” the firm said.

The SEC’s case continues against Fabrice Tourre, the only Goldman Sachs employee the agency sued over the CDO. Tourre, 31, is due to respond to the complaint by July 19. He told a Senate subcommittee in April that he “categorically” denies the SEC’s allegations and will fight them in court.

The SEC’s deputy enforcement director, Lorin Reisner, said Goldman Sachs agreed to cooperate in the case against Tourre, who is on leave and whose legal expenses are being paid by the company. Tourre’s attorney, Pamela Chepiga at Allen & Overy LLP, didn’t reply to an e-mail and phone message.

Blankfein, 55, and the firm’s other senior managers may not emerge from the SEC case unscathed, even if they weren’t forced to resign.

‘Repair Their Reputation’

“Within a decent interval, you’re probably going to see a new CEO,” said Christopher Whalen, a New York Federal Reserve official in the 1980s and co-founder of Institutional Risk Analytics, in an interview on Bloomberg Television. “They still have a lot of work to do with clients and may face claims and litigation going forward, and they have to repair their reputation.”

William Cohan, an author and former investment banker who is writing a book about Goldman Sachs, said that Blankfein’s position is secure for the “foreseeable future.” Cohan expects the next CEO will come from an investment banking background rather than trading, the business drawing regulators’ scrutiny.

“I will predict that this is the last trading-oriented CEO of Goldman Sachs for a while,” Cohan said in an interview with Bloomberg Television.

SEC Chairman Mary Schapiro, 55, has previously denied speculation that the lawsuit was filed to support financial- reform legislation backed by President Barack Obama by casting Goldman Sachs, the most profitable securities firm in Wall Street history, as a villain. There was “absolutely no consideration” to the bill, Khuzami told reporters, hours after the bill cleared the Senate. Still, the timing raised some eyebrows.

‘Highly Suspicious’

“It is highly suspicious, and it makes the SEC now look like it is totally politicized,” said Paul Atkins, a former Republican SEC commissioner who is now a financial services consultant.

While the SEC touted the $550 million settlement as the largest it ever levied against a Wall Street firm, it fell short of some analysts’ estimates for a $1 billion fine. Hintz, who estimated the agreement will shave 93 cents from the firm’s earnings, said he had predicted it would cost $1.05 per share.

For Goldman Sachs, the cost represents approximately 14 days’ worth of earnings, based on first-quarter profit. Blankfein, who was awarded a record-setting $67.9 million bonus for 2007, has stock in the firm that’s worth almost $490 million, based on the firm’s last proxy statement.

The SEC’s disclosure yesterday that it planned a “significant announcement” fueled speculation that a deal was imminent, sending the firm’s shares up 4.4 percent to $145.22 at the end of New York Stock Exchange composite trading. The stock, which had lost more than 20 percent since the suit was filed, is likely to rise further, said Hintz.

“I’m jumping up and down and telling my dad to buy it,” Hintz said of Goldman Sachs’s stock.

To contact the reporters on this story: Christine Harper in New York at charper@bloomberg.net Joshua Gallu in Washington at jgallu@bloomberg.net.

Goldman Fraud Charge: It's The Sachs on Wall Street, Not Saks Fifth Avenue

John Keefe , 04/21/10

Today there’s a reward, I hope, to readers who have indulged the background posts (1, 2 and 3) of the last few days: my perspective on last week’s fraud charge brought by the SEC against Goldman Sachs.

I’m not surprised that the SEC brought the charge: Goldman is the biggest elephant in the financial world these days, and because they are such astute businessmen, they made a boatload of money straight through the financial crisis, and indeed profited from it. The SEC must have found GS an appealing target, figuring no one — outside the firm, that is — would object to them being made some sort of scapegoat or allegory for the damage the financial world brought on us.

But to make the fuss over this particular transaction seems misdirected. It was a private deal, among big investors who considered themselves knowledgeable and

 sophisticated. Such big players prefer to be excluded from the protections afforded to little-guy investors, and accordingly the authorities allow them to trade among themselves in any way they want.

Yes, there were government bailouts made in the end, but these investors went in to the deal willingly, and should have known, or at least contemplated the possibility, that they would be taken to the cleaners. It’s Goldman Sachs, after all, not Saks Fifth Avenue. Or as one of my bosses at a sharp-elbow Wall Street firm used to remind us: “This isn’t the Red Cross.”

The investors and aggrieved parties in this deal — IKB, a German bank and ACA, a specialist firm in collateralized debt obligations, and companies related to them — should have known this was a high-stakes, buyer-beware sort of game.

You’ve probably read a dozen descriptions of that transaction, but I am going to try my hand.

1. According to the SEC, hedge fund manager John Paulson wanted to get against the subprime mortgage market in a big way. (Remember my pointing out in Part 3 of my buildup that Fed Chairman Ben Bernanke felt the same way — perhaps without the same conviction.) In early 2007, Paulson and his folks surveyed the U.S. mortgage landscape, and selected 123 mortgage bonds that he thought were especially likely to suffer delinquencies.

2. He asked Goldman to make them into a package — a collateralized debt obligation — and find someone to buy it. Goldman did, hiring a CDO specialist called ACA to give the thing credibility.

(Paulson also shopped the idea to the late Bear Stearns, according to a recent book on the crisis, but it didn’t pass Bear’s smell test.)

3. Crucial to the way this plays out is the SEC’s contention that ACA did not know that Paulson, who was visible as the sponsor of the deal, intended to bet against it. (The Financial Times has a great writeup.)

4. The deal is done! with Goldman taking a small piece, ACA, who assembled the thing, buying $950 million, and IKB, a German bank, taking a $150 million stake.

5. Paulson sells the CDO short, via a credit default swap.

6. Less than a year later, the CDO turns to dust. ACA and IKB lose big, and Paulson makes $1 billion on its bet the mortgages would default.

OK, I get what the SEC is doing — they need to punish someone, and Goldman is the people’s choice. But the ones that really need the lesson are ACA and IKB. By entering this deal in the first place, in striving for yields that simply didn’t exist in the marketplace at the time, they added to the froth of the mortgage market and increased risk to the financial system.

Granted, the German banks didn’t do well throughout any of this, we learn from the FT:

Look at any transaction that turned sour during the financial crisis and there is a good chance there will be a German bank close to the wrong end of the agreement.

But ACA is an expert in this area, or was, and should have, or could have, known how faulty the underlying mortgages were. If there were rules on the books against not paying attention, maybe the SEC would be suing them.

Did you watch The Sopranos? In a few episodes the fellows were running a poker game in a motel out by Kennedy Airport, and they would find patsies interested in playing all night with the big boys (in one episode, Frank Sinatra Jr. was at the table, paying himself, perhaps presaging the role of CDO specialist ACA). Of course they lost money — how can you expect to win when you sit down at a poker table with Tony Soprano?

Of course someone made a bundle when the CDO failed. Let me be clear, especially to my friends in media relations at Goldman — I’m not saying Goldman Sachs are gangsters or have broken laws. But they are the toughest guys around.

For large investors to expect that Goldman disclose and divulge every possible detail, and foretell everything that might change or go wrong in the deal, in a market that even the Fed chairman acknowledged was imperiled, is simply naïve. They are the smartest and richest guys around, and everyone in the institutional market knows they didn’t get that way by sharing.

http://moneywatch.bnet.com/economic-news/blog/macro-view/goldman-fraud-charge-its-the-sachs-on-wall-street-not-saks-fifth-avenue/1920/

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Goldman Sachs accused of fraud by US regulator SEC

BBC News

Goldman Sachs, the Wall Street powerhouse, has been accused of defrauding investors by America's financial regulator.

The Securities and Exchange Commission (SEC) alleges that Goldman failed to disclose conflicts of interest.

The claims concern Goldman's marketing of sub-prime mortgage investments just as the US housing market faltered.

Goldman rejected the SEC's allegations, saying that it would "vigorously" defend its reputation.

News that the SEC was pressing civil fraud charges against Goldman and one of its London-based vice presidents, Fabrice Tourre, sent shares in the investment bank tumbling 12%.

The SEC says Goldman failed to disclose "vital information" that one of its clients, Paulson & Co, helped choose which securities were packaged into the mortgage portfolio.

These securities were sold to investors in 2007.

But Goldman did not disclose that Paulson, one of the world's largest hedge funds, had bet that the value of the securities would fall.

The SEC said: "Unbeknownst to investors, Paulson... which was posed to benefit if the [securities] defaulted, played a significant role in selecting which [securities] should make up the portfolio."

"In sum, Goldman Sachs arranged a transaction at Paulson's request in which Paulson heavily influenced the selection of the portfolio to suit its economic interests," said the Commission.

Housing collapse

The SEC alleges that investors in the mortgage securities, packaged into a vehicle called Abacus, lost more than $1bn (£650m) in the US housing collapse.

Mr Tourre was principally behind the creation of Abacus, which agreed its deal with Paulson in April 2007, the SEC said.

The Commission alleges that Mr Tourre knew the market in mortgage-backed securities was about to be hit well before this date.

The SEC's court document quotes an email from Mr Tourre to a friend in January 2007. "More and more leverage in the system. Only potential survivor, the fabulous Fab[rice Tourre]... standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!"

Goldman denied any wrongdoing, saying in a brief statement: "The SEC's charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation."

The firm said that, rather than make money from the deal, it lost $90m.

The two investors that lost the most money, German bank IKB and ACA Capital Management, were two "sophisticated mortgage investors" who knew the risk, Goldman said.

And nor was there any failure of disclosure, because "market makers do not disclose the identities of a buyer to a seller and vice versa."

Calls to Mr Tourre's office were referred to the Goldman press office. Paulson has not been charged.

Asked why the SEC did not also pursue a case against Paulson, Enforcement Director Robert Khuzami told reporters: "It was Goldman that made the representations to investors. Paulson did not."

The firm's owner, John Paulson - no relation to former US Treasury Secretary Henry Paulson - made billions of dollars betting against sub-prime mortgage securities.

In a statement, Paulson & Co. said: "As the SEC said at its press conference, Paulson is not the subject of this complaint, made no misrepresentations and is not the subject of any charges."

'Regulation risk'

Goldman, arguably the world's most prestigious investment bank, had escaped relatively unscathed from the global financial meltdown.

This is the first time regulators have acted against a Wall Street deal that allegedly helped investors take advantage of the US housing market collapse.

The charges come as US lawmakers get tough on Wall Street practices that helped cause the financial crisis. Among proposals being considered by Congress is tougher rules for complex investments like those involved in the alleged Goldman fraud.

Observers said the SEC's move dealt a blow to Goldman's standing. "It undermines their brand," said Simon Johnson, a professor at the Massachusetts Institute of Technology and a Goldman critic. "It undermines their political clout."

Analyst Matt McCormick of Bahl & Gaynor said that the allegation could "be a fulcrum to push for even tighter regulation".

"Goldman has a fight in front of it," he said.

http://news.bbc.co.uk/2/hi/8625931.stm

轉貼三篇和"高盛惡搞"相關的報導/評論。 -- 卜凱

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