STRONG RESULTS from Goldman Sachs yesterday were overshadowed by the fallout from the US civil fraud case against the bank, as UK regulators opened their own inquiry and fresh details emerged about the security at the centre of the controversy.
Goldman announced better-than-expected net earnings of $3.5 billion (€2.6 billion) in the first quarter and issued a forceful denial of the charges by the US Securities and Exchange Commission (SEC).
On Friday, the SEC accused the bank and one of its vice-presidents of hiding from investors that hedge fund Paulson Co influenced the composition of a mortgage-backed security it wanted to bet against.
“We would never intentionally mislead anyone, certainly not our clients or a counterparty,” Greg Palm, Goldman’s general counsel, said. “We have never condoned and would never condone inappropriate behaviour by any of our people.”
Mr Palm said the losses incurred by the collateralised debt obligation (CDO), a mortgage-backed security, were due to the collapse of the US housing market rather than the product’s composition.
However, a table included by Goldman in its September response to the SEC shows that the CDO incurred writedowns in less than a month compared with an average of 1.7 months for similar deals. Goldman insiders say this was due to the timing of the CDO, just before the end of the US housing bubble in April 2007.
But some lawyers believe the data could support the SEC case. Goldman left the door open to a settlement – a common occurrence in US regulatory cases – but said it had been “very disappointed” by the SEC’s action.
The bank surprised analysts when it said it had lost more than $100 million on the controversial CDO, three days after stating its net loss was $75 million. – (Copyright The Financial Times Limited 2010)
