Financial Regulatory Forum

INSTANT VIEW – SEC charges Goldman Sachs with fraud

By Reuters Staff
April 16, 2010

(Adds additional comment)

NEW YORK, April 16 (Reuters) – Goldman Sachs Group Inc was on Friday charged with fraud by the U.S. Securities and Exchange Commission in the structuring and marketing of a debt product tied to subprime mortgages.

The SEC alleged that Goldman structured and marketed a synthetic collateralized debt obligation that hinged on the performance of subprime residential mortgage-backed securities, and which cost investors more than $1 billion.

The following is reaction from industry analysts and investors:

MALCOLM POLLEY, CHIEF INVESTMENT OFFICER, STEWART CAPITAL ADVISORS, INDIANA, PENNSYLVANIA:

“People wonder how Goldman was able to make as much money in trading as they did at a time when nobody else was doing anything and maybe this is a reason why. How widespread this is, time will tell. If the SEC has brought charges on one instance my guess is it will open a can of worms.”

“Today, they (Goldman shares) are taking it in the shorts. Until you get some kind of view as to whether the SEC is onto something or Goldman Sachs is correct, my guess trading will be sloppy.”

JAMES ELLMAN, PRESIDENT, SEACLIFF CAPITAL IN SAN FRANCISCO

“It certainly looks like Fabulous Fab and Groovy Goldman got caught with their hands caught well into the cookie jar this time.

“Were there any other synthetic CDOs created where there was an outside agency that was shorting the securities assisting in the selection of the securities? In this case it was Paulson and Company. We know a little bit better now how Paulson was able to make so much money off of its trades because to a certain extent he rigged the game. Potentially this could cause problems for Paulson. They are not being charged in this but it could potentially cause them some problems. I’m sure they’re going to have a lot of handholding to do with their larger investors after this.

“Other firms that lost money owning synthetic CDOs, even if nothing untoward was occurring, those companies will now likely want to try and sue.

“For all the major firms that created synthetic CDOs – their litigation costs will go up, even if there’s nothing there.

“As they say on Wall Street, ‘There’s never just one cockroach.’ There are probably others.

“Net-net even if Goldman loses a couple of billion dollars off of this thing they will still have been the only firm to have made billions of dollars off of the collapse of the housing market.

“Many have said that that one percent tax rate in 2008 was the biggest finger flipped in the face of the U.S. government during the meltdown. It looks like the U.S. government is returning the favour today.

“What is it that makes people committing hanky panky on Wall Street, what makes them sit down at their computers and write emails about what they are doing?”

ANGUS CAMPBELL, HEAD OF SALES, CAPITAL SPREADS, LONDON

“For one of the most highly respected banks in the world to be hit by this news is going to have serious ramifications as fear sets in that they may not be the only one to have misled investors. The revelations of the fraud, made in relation to sub prime mortgages nonetheless, come at a time when bankers’ popularity is at its lowest ebb and now it will only get lower.”

CARY LEAHEY, SENIOR MANAGING DIRECTOR, DECISION ECONOMICS, NEW YORK:

“The SEC has come out swinging, going after the biggest, most recognized name on Wall Street with regard to alleged abuses in the credit derivatives market. This will be a difficult case to prove, particularly to the laymen on the jury, as even supposed experts on Wall Street with years of experience in this area are still scratching their heads trying to figure out who did what to whom and when.”

RON D’VARI, CHIEF EXECUTIVE OFFICER, NEWOAK CAPITAL, NEW YORK:

“This is history taking its course. People are trying to figure out what happened and the public is asking for it. I don’t think people should come to a conclusion on this but it shows the system is working.

“Like any other products there are good uses and bad uses. There are unintended consequences and then there is really what is considered abuse, and that’s the thing that people still have to figure out.” On marketing:

“Every person who was anywhere near securities law knows these documents have very large disclaimers. Ultimately what you are looking at is whether people have read the disclaimers. When performance turns around, everybody is going to look for something for crying foul. The question is are they unintended accidents.”

JOSHUA RAYMOND, MARKET STRATEGIST, CITY INDEX, LONDON

“This news now creates uncertainty in the market in terms of whether there are likely to be any other major banks involved or under investigation. Moreover, we don’t know what the consequences of this charge will be for the bank.”

CHAD MORGANLANDER, PORTFOLIO MANAGER, STIFEL, NICOLAUS & CO, FLORHAM PARK, NEW JERSEY:

“This is fairly substantial news that has put uncertainty into the financial markets today. No surprise that regulators were going to look at dealings within every security firm to see if there’s any contradictions that do not hold to scrutiny. Albeit this will not shake the core of Goldman Sachs and I would be a buyer on pullbacks.

“For the financials this has created uncertainty so one has to question who’s the next to be called out by the SEC.

“They will pay a fine, the stock will trade off, there will be an increased probability of uncertainty and risk within the company. But one has to keep proper perspective on the implications and what the monetary resolution will be. I do not believe this will be an issue that will impact the livelihood of Goldman.

“The market trades in tandem with uncertainty and especially financials, and this is a curve ball that the market did not see going into earnings season.”

JOSEPH BATTIPAGLIA, MARKET STRATEGIST, STIFEL NICOLAUS, YARDLEY, PENNSYLVANIA:

“I think that whole initiative is not isolated to Goldman Sachs. There will be probes that cut across to other bank institutions, including those that have been absorbed by other banks.

“The $64 million question would be is there some sort of unravelling of Goldman that will be coming down the pike, and I’d rather doubt it.”

HANK SMITH, CHIEF INVESTMENT OFFICER AT HAVERFORD TRUST CO IN PHILADELPHIA

“It looked like the market was gradually improving and getting to even before this Goldman news hit.

“I don’t think it’s going to impact the recovery and the improvement in the financial system, but it certainly looks like this could be the beginning of a period where you have a regulatory cloud over Goldman Sachs and perhaps even the entire investment banking industry.

“One thing that is true is when the specter of Washington, DC is over an industry, you usually don’t get performance.

“I don’t know if it’s going after the big guy — Goldman is clearly the 100-pound gorilla in the room — or whether this speaks to something that is broader to the entire industry.

“It seems as though we the investment community have been anticipating a pullback.

“In fact, the previous two pullbacks we have experienced started at beginning of earns reporting season and so this might well be the beginning of a 5 percent pullback.”

WALTER TODD, PORTFOLIO MANAGER, GREENWOOD CAPITAL

“This is big. That’s an aggressive move by the SEC. Reputationally, obviously it is damaging. I’m still kind of in shock.”

“There were many, many questionable practices that occurred as it relates to the CDO market and many other structured products. There were a variety of firms involved in that. While this has specifics related to a product Goldman put together, I’m sure the SEC could look at other products and other practices that took place at other firms and find similar shortcomings.”

RICHARD BOVE, BANKING ANALYST WITH ROCHDALE SECURITIES IN LUTZ, FLORIDA

“If I’m an investor in Goldman Sachs’s stock, the question I have to ask myself is has the firm been harmed in a fashion that’s going to reduce it’s secular growth or its businesses going forward. I don’t think it has.”

“People will all freak out, but even if Goldman is hit with a $1 billion fine, I don’t think people will stop trading with Goldman Sachs because of this issue.”

MATT MCCORMICK, PORTFOLIO MANAGER, BAHL & GAYNOR

“Goldman has a fight in front of it. This could be a fulcrum to push for even tighter regulation.”

“Clearly the market views this as a negative. They feel the issues are worthy of consideration here. Statistically in the past Goldman has been accused of these activities and strongly denied them and people gave them the benefit of the doubt. Now, as these issues come to light, for Goldman’s sake I hope they have the ability prove that original assertions.”

BLAKE HOWELLS, HEAD OF EQUITY RESEARCH AT BECKER CAPITAL MANAGEMENT, PORTLAND OREGON:

“The political environment is such that the regulators feel that somebody needs to take a fall.

“When these things happen, often heads roll at the top. There might need to be a change at the top, to show the board is serious about changing the culture.”

GARY TOWNSEND, PRESIDENT AND CEO, HILL-TOWNSEND CAPITAL IN CHEVY CHASE, MARYLAND

“It’s certainly an issue in the stock performance today. I think in the longrun it is not going to have a material impact on Goldman. Whatever issues there are will be sorted out.

“In terms of its materiality it’s a hit of course reputationally. They need to deal with the issues of how this plays in the marketplace — but in terms of longterm impact on Goldman it’s not going to be material.

On Blankfein:

“Does he need to get out of there? No. This is an allegation from the SEC and that’s about all we know right now. It hasn’t been vetted through any type of administrative process and often times these end up negotiated in one way or another.”

(Reporting by Dan Wilchins, Al Yoon, Ed Krudy, Leah Schnurr, Caroline Valetkevitch, Herb Lash, Ellen Freilich, Steve Eder and Clare Baldwin in New York and Dominic Lau in London)

((Reuters Messaging: christian.plumb.reuters.com@reuters.net +1 646 223

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