Reuters blog archive

from Financial Regulatory Forum:

What are the odds on a three-legged horse?

Senators quizzing Goldman Sachs executives yesterday seemed at least as concerned about the wider ethical issues of investment banking as they did about the actual charges that the SEC has laid against Goldman, writes John Manley.
Senators forcefully argued that bankers should place the interests of their clients – and even perhaps the national interest – above their own interests.
One senator even cited an earlier senate committee report on the Great Crash of 1929 to press the case that clients come first. “Investors must believe,” he quoted, “that their investment bankers would not offer them the bonds unless the banker believed they would succeed.”
 That sounds fair. It’s the rule that governs the sale of consumer goods. If the store sells you a lawn mower, it should do so in the belief that it will cut your grass. And if it doesn’t work, the store has to sort out the problem.
But can this doctrine really extend to modern derivative markets where investors are trading risk, rather than the underlying assets? 
Instruments like the synthetic CDO in the Goldman case are designed to attract investors to both sides of the deal. Some will short the instrument, some will go long. They will all invest at a price that reflects the risk they think they’re taking.
If the price goes up, investors who went long will cash in. If the price falls, the short sellers will win.
But what is the investment bank in the middle of this see-saw meant to do? Whichever way the price moves, one bunch of investors is going to see the issue as a success, and the other bunch will see it as a failure. Do the senators think the losing side should be able to sue the issuing bank for selling them an instrument that was designed to fail?
Senator Claire McCaskill was not trying to compliment the Goldman Sachs executives when she likened them to bookmakers. And the guys from Goldman clearly felt the slight. Obviously unamused, one of them said he preferred “bid offer spread” to McCaskill's gambling term, “the vig”.
But in this case, despite the blow to their self-esteem, it is a simile that the Goldman guys should welcome. 
If I tried to bet on a three legged horse, and the bookie offered me odds of 10-1; I’d think it a bit expensive, and refuse the bet.
But if he offered me odds of 500-1, I’d take the bet – after all, there’s a slim chance that all the other horses in the race could fall, leaving my hopalong nag to limp home alone.
What I wouldn’t do is complain that the bookie had sold me a bet on a horse he knew was going to fail.

from Financial Regulatory Forum:

Reid wages war of attrition on financial reform bill: John Kemp

Senate Majority Leader Harry Reid has scheduled another vote on financial reform later today, the fourth such vote in three days, as he tries to grind down opposition from Senate Republicans, writes Reuters columnist John Kemp.
Reid is making good on his threat to keep the financial reform bill (S 3217) on the floor of the Senate, and at the forefront of media attention, for as long as it takes to get movement on the bill. He is daring the Republicans to continue obstructing it and risk being tied in the public mind to a deeply unpopular Wall Street ahead of mid-term congressional elections in November [ID:nLDE63J0XH].
Whether the gamble by the senator from Nevada is worth taking depends on how the issue plays out in the media and opinion surveys. No one in the Senate wants the chamber to be permanently gridlocked discussing financial reform, unable to move on to other business.
The Democratic leader is betting that Republicans will not, in the end, risk being blamed for the bill’s failure and supporting an unpopular status quo. Polls published by the Washington Post newspaper earlier this week showed voters support financial reform by a margin of 2:1.
But there is less agreement on exactly what form the overhaul should take. On derivatives, which is a high priority for Wall Street, the public is split, and shows relatively little interest. In other areas, the public seems keen on ensuring banks are never ever bailed out again, a tough position not even the administration supports.

Republican leaders and Wall Street’s retained lobbyists are busy trying to broaden the debate to bring in Main Street as an ally of Wall Street, while hoping to blame the Democrats for intransigence by refusing to negotiate a fresh, bipartisan measure.
In recent weeks, Senate Republican Leader Mitch McConnell and Senator Richard Shelby (R, Alabama), the senior Republican on the Banking Committee, had focused opposition on the question of a $50 billion bank bailout fund. But the criticism is now being broadened out again to encompass a much wider list of issues.
Senate Republicans have renewed their attack on the consumer protection agency for threatening to restrict credit, and on the refusal to exempt end-users from requirements to post collateral for their derivatives.
Lobbyists have lined up an impressive range of groups from outside Wall Street to oppose the bill and demand significant changes, including local community bankers, small businesses, the U.S. Chamber of Commerce. The strategy is to show that financial overhaul is not targeted at Wall Street, but will affect consumers and businesses on Main Street too.
Yesterday car dealers were brought to Washington by the National Automobile Dealers Association (NADA) to protest against the bill’s “unintended consequences” and lobby in favour of an amendment proposed by Senator Sam Brownback (R, Kansas) exempting them from the proposed consumer protection rules.
Dealers are “making it clear that they aren’t banks” and “had nothing to do with the problems caused by Wall Street”, according to NADA.

from Financial Regulatory Forum:

Goldman Sachs: Shareholder Revolt Spreads Where the SEC Has Yet to Tread

Where the SEC goes, plaintiffs' lawyers are sure to follow. But in the case of Goldman Sachs, they’ve charged ahead straight into the C-suite, alleging far broader levels of misdeed than the SEC’s limited charges surrounding an individual transaction, writes Erik Krusch of Thomson Reuters Westlaw Business Currents. (Click here for further details.) 
Goldman Sachs was charged by the Commission in the case of SEC v. Goldman Sachs and Fabrice Tourre with fraudulently structuring and selling a synthetic collateral debt obligation (CDO). Now plaintiffs’ lawyers are angling for a piece of the Goldman pie, but unlike the SEC, these shareholder suits sport an entirely different caliber of co-defendants.
The SEC’s pursuit of Goldman has topped the headlines for the past week. Goldman has been dogged by disclosure issues on at least two fronts: the ABACUS 2007-AC1 transaction and a Wells Notice regarding ABACUS that the bank later received. The SEC’s case against Goldman turns on the way that the bank disclosed the involvement of hedge fund in the ABACUS 2007-AC1 structuring to other deal parties. The SEC alleges that the deal’s market materials crossed the line for fraud. Considering how popular shorting subprime mortgages and synthetic CDOs became, it remains to be seen if Goldman is the only bank that the SEC is eyeing for fraudulent CDO disclosure. For additional information on the case of SEC v. Goldman, Sachs & Co. and Fabrice Tourre and Paulson & Co.’s role, please see the previous Westlaw Business Currents article CDO Litigation: The SEC, Goldman, and its Courtroom Cousins.
Similarly, questions revolve around Goldman’s decision not to disclose the Wells Notice it received regarding ABACUS 2007 AC-1. A Wells Notice informs a company or individual that the SEC is considering civil charges. Public companies often disclose when they or one of their employees receives a Wells Notice, but Goldman didn’t disclose the notice it received on Abacus. For additional information Goldman’s Wells Notice and other banks disclosure of subprime related Wells Notice please see the previous Westlaw Business Currents article Hot Topic: Disclosing Wells Notices and Goldman.
As of this week, the SEC isn’t alone at taking aim at Goldman’s disclosure. The recently filed Richman v. Goldman Sachs Group Inc et al. is a shareholder class action suit led by named plaintiff class representative Ilene Richman, filed in the Southern District of New York. The complaint takes aim squarely at the bank’s decision to not disclose the ABACUS Wells Notice. The suit alleges that Goldman and co-defendants Lloyd C. Blankfein (Chairman and CEO), David A. Viniar (CFO), and Gary D. Cohn (President and COO) violated federal securities law by issuing materially false and misleading statements during the class period – between October 15, 2009 and the time it was publicly revealed on April 16, 2010 that the SEC had sued Goldman. The complaint asserts, among other things, that updates the bank made to its 10-Q and 10-K legal proceeding sections were false and materially misleading because they made no mention of the Wells Notice and ongoing investigation into ABACUS 2007-AC1. Robbins Geller Rudman & Dowd is representing the plaintiffs in the matter.
Ilene Richman is not the only irate shareholder. Rosinek v. Blankfein et al. is a shareholder derivative suit filed in New York State Supreme Court. The suit alleges breach of fiduciary duty against Goldman Sachs and names each member of the board of directors, including CEO and Chairman Lloyd Blankfein, as co-defendants. The complaint in this case alleges that the board breached its fiduciary duty by failing to institute adequate internal controls on the 23 ABACUS transactions, one of which is the focus of the SEC complaint. The suit claims:
As a direct and legal result of the Individual Defendants' wrongful conduct, Goldman Sachs has been significantly and materially damaged, faces billions of dollars of liability, has incurred and will continue to incur millions of dollars of expense in defending the claims against the SEC and investors, and has suffered serious damage to its reputation and image.
The suit is seeking maintenance as a derivative action, compensatory damages, court costs, and any further compensation the court deems appropriate. Farqui & Farqui is representing the plaintiffs.
Spiegel v. Blankfein et al. is yet another shareholder derivative suit that has been filed in New York State Supreme Court. The complaint is a carbon copy of the complaint in Rosinek v. Blankfein et al. Farqui & Farqui and Gardy & Notis are representing the plaintiffs.
It remains to be seen if the SEC or shareholders will have any luck cowing a defiant Goldman Sachs in court. The shareholder actions, however, are aiming much higher in the corporate food chain than the SEC’s target, Vice President Fabrice Tourre. It seems shareholders think that disclosure problems swirling around ABACUS 2007-AC1 and the Wells Notice reside in the boardroom and at C-suite level.

from Global Investing:

Investors wary of BP oil spill cost estimates

BP logo

BP’s CEO Tony Hayward reckons the $100 million cost of drilling a well to divert the flow from a leaking oil well in the Gulf of Mexico  is the biggest hit the oil major will take in the Deepwater Horizon tragedy.

The Deepwater Horizon rig exploded last week, and sank, with the loss of 11 workers, who are now presumed dead, while the well it was drilling is leaking 1,000 barrels of crude a day into the sea.

from Financial Regulatory Forum:

Will Goldman Complaint Repair the Damage from Madoff Fiasco?

Some former government prosecutors are cheering the SEC's case against Goldman Sachs. Some even called it a watershed event that might rehabilitate the SEC's image, which has been tarnished in the fallout from the financial crisis and the failure to catch financial fraudsters like Bernard Madoff. Now all the SEC has to do is win its trial against Goldman, which is vowing to fight the charges, reports WG&L, from Thomson Reuters tax and accounting specialists.Some lawyers called the SEC’s civil complaint against Goldman Sachs Group Inc.'s brokerage unit a “watershed” moment, in which the agency will be once again looked at as a tough regulator.

 “I looked up and said, ‘thank, God,’” said Stanley Sporkin, who ran the enforcement division in the 1970s and is a former federal judge. The complaint gives “tremendous credibility to the agency.”

from Financial Regulatory Forum:

Democrats press advantage on financial reform

   By Andy Sullivan and Kevin Drawbaugh
   WASHINGTON, April 21 (Reuters) - Democrats in the U.S. Senate pressed forward on a sweeping regulation overhaul on Wednesday, backing a measure to drive banks from the lucrative derivatives market at the heart of the financial crisis.
   As President Barack Obama prepared to call on Wall Street to get behind reforms, Democrats sought to ride widespread public anger at the financial industry to a legislative victory in Congress. Bank stocks were mixed in broadly flat trading.
   Democratic Senator Christopher Dodd, who is heading up the overhaul effort, said he would present legislation to the Senate within hours, but aides cautioned that a pivotal procedural vote could not come until early next week.
   The overhaul will likely include a crackdown on the unregulated $450 trillion derivatives market, which could drive Wall Street behemoths like Goldman Sachs <GS.N> and Morgan Stanley <MS.N> to restructure or spin off derivatives trading.
   "If banks want to be banks, they can remain banks, but they're going to need to spin off that activity," Senate Agriculture Committee Chairman Blanche Lincoln said after her panel voted to advance the measure on derivatives.
 <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ COLUMN: GOP in dilemma on financial reform     [ID:nLDE63J0XH] FACTBOX: Major financial reform proposals      [ID:nLDE63D217] NEWSMAKER-Farmer's daughter takes on Wall St   [ID:nN16132985] TAKE A LOOK: U.S. Financial Regulation         [ID:nN16148428] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
   Lincoln's hard-hitting bill, in whole or in part, was expected to be folded into a broader measure already approved by the Senate Banking Committee. Debate on it could begin next week. The Senate is not slated to cast any votes on Friday.
   Democrats see Wall Street reform as a chance to harness voter anger at big banks for their role in the 2007-2009 economic crisis ahead of November's congressional elections.
   Fraud charges brought last week against Goldman Sachs have given the overhaul more momentum. "It just reinforces the perception that people have about some of these Wall Street investment banks," Senator John Thune told reporters.
   After meeting with other Republicans on the status of negotiations with Democrats over reform proposals, Thune said it was still possible to hammer out a bipartisan measure.
   "I think we're going to end up with a bipartisan bill," said Republican Senator Bob Corker on the Senate floor.
   Senate Banking Committee Chairman Christopher Dodd is negotiating with Republican Richard Shelby, who told reporters after the briefing that the two sides were still talking.
   Democrats need at least one Republican vote to advance the broader reform measure in a procedural vote. Key Republican moderates like Susan Collins have said they will withhold their support until Dodd and Shelby have reached a deal.
   Asked if he was confident all 41 Republicans could hold together and block the Democratic bill, if it came to that, Thune said, "I'm not entirely confident, but I'm hopeful."
   The Democrats' reform bill would cut the U.S. budget deficit by $21 billion over the next 10 years, according to Congressional Budget Office estimate obtained by Reuters.
   The estimated reduction in the budget deficit over the 2011-2020 period stems largely from charging the financial industry assessments for a fund to liquidate large, troubled financial firms, the office said.
   Obama called for tighter rules against Wall Street excess.
   "We have gotten into one of those places where we need to update those rules of the road," Obama said in an interview with CNBC on the eve of a financial speech in New York.
   In his speech on Thursday, Obama will tell Wall Street to "join him in the effort to reform the financial system -- not fight it" and urge lawmakers to pass the legislation under consideration now by the Senate, a White House official said .
   Republican Charles Grassley voted with Democrats to advance the derivatives bill, although he said he might still vote against the wider bill on the Senate floor. [nN21197740]
   Any proposal that clears the Senate would have to be reconciled with an overhaul passed by the House of Representatives last December.
   Lincoln shocked markets last week by proposing banks participating in the swaps market should give up protections like access to the Federal Reserve discount window -- which could force them to sell off swaps trading desks.
   Derivatives, which are based on underlying assets like bonds or commodities, have been blamed for exacerbating the credit crisis and contributing to the sort of run on assets that downed Lehman Brothers.
   Swaps transactions also helped trigger insurer American International Group's <AIG.N> massive government bailout.
   The bill would require most derivatives to trade on exchanges and pass through clearing houses.
   The head of the Securities and Exchange Commission criticized the bill for removing certain securities options, exchange-traded funds and securities forwards from the agency's oversight. [nN21197408]
   Lincoln's bill is the latest salvo in a barrage of tough measures meant to crack down on Wall Street for the excessive risk-taking that precipitated the recession.
   A congressional panel investigating the origins of the crisis said it has issued a subpoena to Moody's Corp <MCO.N>, a major credit rating agency, because it has not complied with voluntary requests for information. [nWBT013821] (Additional reporting by Christopher Doering, Roberta Rampton and David Lawder; editing by Carol Bishopric) ((; +1 202 898 8391; Reuters Messaging: Keywords: FINANCIAL REGULATION/ 
Thursday, 22 April 2010 00:35:22RTRS [nN21479339] {C}ENDS

from Financial Regulatory Forum:

Goldman CEO attacks SEC fraud charges – FT

    NEW YORK, April 21 (Reuters) - Goldman Sachs Group Inc <GS.N> Chief Executive Lloyd Blankfein attacked U.S. Securities and Exchange Commission fraud charges against the bank in phone calls to clients, the Financial Times said on Wednesday. 
   In its civil fraud lawsuit on Friday, the SEC alleged that Goldman failed to tell clients that complex mortgage-related securities they were buying had been created by billionaire hedge fund investor John Paulson, who stood to benefit if the securities lost value. Paulson has not been charged.
   Blankfein is trying to bolster confidence of business partners following the lawsuit, according to the newspaper.
   It said that in conversations with private equity executives and others, Blankfein left clients with an impression he is eager to fight the case in court.
   "He was very aggressive," the newspaper said, quoting an unnamed person called by Blankfein on Wednesday. "He feels that the government is out to kill them, that they are under attack and the whole thing is totally political," and that the SEC lawsuit "hurts America," the person said.
   A call to Goldman was not immediately returned.
   According to the newspaper, citing a person who was called, Blankfein also said a female staffer at ACA, the manager of the security, knew that Paulson & Co intended to bet against the transaction.
   This, it said, would go against SEC charges that Goldman failed to disclose that Paulson was taking the opposite side. (Reporting by Jonathan Stempel; Editing by Lincoln Feast) (( +1 646 223 6317; Reuters Messaging:
Thursday, 22 April 2010 03:53:19RTRS [nN21119356] {C}ENDS

from Financial Regulatory Forum:

Paulson reassures clients on Goldman deal, no exits yet

FINANCIAL/   By Svea Herbst-Bayliss
   BOSTON, April 20 (Reuters) - Clients with Paulson & Co, which was involved in a mortgage deal that prompted civil fraud charges against Goldman Sachs <GS.N>, spoke with the manager on Monday, but so far no one has notified the firm of plans to leave his fund, several investors said. 
   "We are interested in buying out people who want to get out of Paulson but so far no one has stepped forward," one of the investors, who asked not to be named because of the sensitivity of the matter, said on Tuesday evening.
   "I just spoke with someone from Paulson's investor relations team this evening and there isn't anyone who has said that they want to get out," he added.
   After holding a conference call on Monday, the $32 billion hedge fund sent a sent a letter to clients late on Tuesday. A Paulson & Co spokesman declined to comment on the matter.
   Paulson & Co, which earned $15 billion by correctly betting in 2007 that the housing market would collapse, has come under a cloud since U.S. securities regulators on Friday accused Goldman Sachs of misleading investors by failing to say that the hedge fund was betting against a Goldman mortgage deal it had also been instrumental in helping the bank set up.
   John Paulson, who personally earned nearly $4 billion from his housing bets, told investors that neither he nor anyone else at the firm had received a so-called Wells notice indicating that charges might be filed, the people who listened said.
   New York-based Paulson & Co has not been charged with any wrongdoing but investor nervousness grew over the weekend, prompting the 16-year old firm's founder to host a conference call on Monday where dozens of people participated.
   Concerns mounted that the government's probe might widen to possibly include other players or that the Paulson & Co might be consumed by battling the whiff of wrong-doing.
   The hedge fund firm has been one of the most profitable in the $1.5 trillion hedge fund industry in recent years.
   The Wall Street Journal reported that some of Paulson's clients are indicating they may withdraw money. [ID:nN20145922]
   Anyone wanting to exit Paulson's funds must stick to the normal time schedule and notify the firm by next April 30, 60 days before the end of the second quarter.
   One investor who listened to the call said he reversed his plans to exit after hearing John Paulson calmly lay out his bet on the conference call. (Editing by Lincoln Feast) ((; +1 617 856 4331; Reuters Messaging:
Wednesday, 21 April 2010 03:26:23RTRS [nN20148074] {C}ENDS

from Financial Regulatory Forum:

Goldman Sachs profit tops forecast, UK opens probe

A security guard walks through Goldman Sachs lobby in New York   By Steve Eder and Steve Slater
   NEW YORK/LONDON, April 20 (Reuters) - Goldman Sachs Group Inc <GS.N> said first-quarter earnings nearly doubled, and Britain's financial regulator launched a formal probe related to civil fraud allegations against the Wall Street bank. 
   Goldman's results came four days after the firm was accused of fraud by the U.S. Securities and Exchange Commission in the structuring and marketing of a debt product tied to subprime mortgages.
   "On the face of it, Goldman's numbers are pretty good, which they do time and time again," said David Morrison, market strategist for GFT Global Markets in London. "Investors will want to focus on the blow-out numbers, but the news the FSA is also probing the firm takes some of the shine off."
   Goldman said net income rose to $3.29 billion, or $5.59 per share, from $1.66 billion, or $3.39 per share, a year earlier. [ID:nN20251055]
   Analysts on average had forecast $4.01 per share, according to Thomson Reuters I/B/E/S.
   Goldman Sachs shares rose 1.3 percent in premarket trading.
   Goldman emerged as Wall Street's most influential bank after the financial crisis but has faced a backlash over its pay and business practices.
   The bank's co-general counsel, Greg Palm, launched a rebuttal of the SEC charges during the bank's earnings conference call.
   Palm said the firm was "very disappointed" that the SEC had brought charges and insisted that Goldman "would never mislead anyone."
   He also said investors who lost money on the subprime mortgage product that is the focus of the SEC suit had a wealth of experience and background in such deals.
   Goldman's forecast-beating earnings came as Britain's Financial Services Authority (FSA) said it had started a formal investigation into Goldman Sachs International in relation to the SEC allegations. FSA said it would work closely with its U.S. counterpart. [ID:nLDE63J0TP]
   UK Business Secretary Peter Mandelson said on BBC Radio, "We have got to look at the whole system of constituting and regulating banks. We need a system of regulation, a system of levying banks, which is internationally applied."
   Nick Clegg, leader of the Liberal Democrats, the UK's third-largest party, said the allegations against Goldman "are a reminder, if we needed one, of the recklessness and greed that disfigured the banking industry as a whole."
   In the United States, political tensions were heightened by reports that the five SEC commissioners split along political lines last week in a vote on whether to file suit against Goldman. The three Democrats voted in favor of the legal action, while the two Republicans opposed it, according to press reports.
   "I have my doubts about this attack on Goldman Sachs, for the simple reason that with two members of the SEC clearly against the indictment, it doesn't make (SEC Chairman) Mary Schapiro's job any easier," said David Buik, senior partner with BGC Partners in London. (Writing by Christian Plumb; Additional reporting by Douwe Miedema and Jon Hopkins in London; editing by John Wallace) ((Reuters Messaging: +1 646 223 6134)) ((Multimedia versions of Reuters Top News are now available for: * 3000 Xtra: visit      * BridgeStation: view story .134                              For more information on Top News: Keywords: GOLDMANSACHS/ 
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 Tuesday, 20 April 2010 13:49:12RTRS [nN20251740] {EN}ENDS