Stand by for some rough days in the markets after the civil fraud charges against Goldman Sachs from US stockmarket regulators.
Goldman Sachs reports first quarter earnings Tuesday night (our time) and CEO, Lloyd Blankfein, is due to appear before the Congressional Investigations sub committee tomorrow week (that’s the serious committee of Congress). It will be tough for him and the bank, and financial markets.
Both events will see the company’s conduct probed.
We can expect either loud protestations of innocence, or stonewalling because of legal advice.
The SEC told Goldman nine months ago it was under investigation and the fact that there’s been no settlement of the charges indicates the seriousness of the case to both sides.
The SEC filed civil charges against Goldman and one of its vice-presidents on Friday, accusing them of failing to disclose that in 2007 Paulson & Co, a hedge fund, had a major role in structuring a mortgage-backed collaterised debt obligation so that it could bet against it.
With eight US banks failing on Friday (50 for the year so far), the Goldman allegations will undermine the increasing confidence of late in markets.
US markets fell sharply and markets in Asia and Europe will follow today.
If proven, the Goldman charges (detailed in 22 pages from the SEC) will resolve the debate over tougher rules for banks and other financial groups, force a split in their operations, hiving off trading and other high risk businesses and force greater disclosure.
Markets will be watching the attitude of Warren Buffett, Goldman’s biggest shareholder and savior during the crunch.
He can convert his current securities into shares at $US115 (the shares ended at $US156 on Friday night).
The value of his Goldman holding lost more than $US1 billion in Friday’s slump.
No selling by Buffett would be an enormous vote of confidence in Goldman from the man regarded as the most upright figure in global finance.
The SEC action will help President Obama and the Democrats in their struggles with Wall Street and the Republicans and with work on new global bank rules reaching a crucial phase from this week on, could very well help rewrite all the rules covering banks around the world.
The behaviour alleged about Goldman by the US Securities and Exchange Commission’s is devastating for the bank’s business.
Bloomberg details more examples of Goldman’s activities in this story over the weekend.
But it neatly captures the most important and damning of the charges that have circulated in the past two years against investment banks in general and Goldman in particular. (Read Michael Lewis’ bank, The Big Short.)
Reuters issued a helpful Factbox that explains the SEC charges. CNN also provided a helpful explanation.
Sales of structured products backed by subprime securities like CDOs (and don’t forget CLOs and their variations) triggered the credit crisis.
The question is whether what is claimed against Goldman was down to deliberate deception, incompetence, bad luck or something else (like the dog ate our homework, I can’t recall etc, etc).
Now it’s up to the SEC to make a charge of deliberate deception stick.
But it’s the moral point of view of the charges that will be most devastating for Goldman and the rest of the banking industry.
For example, the European Commission was quick to promise a "through" investment of claims that Goldman Sachs helped Greece hide the true state of its financial position back in 2002.
That’s why the charges are so damning.
What pension fund or institution could possibly want to do business with a bank that behaves in the way Goldman is portrayed in the SEC’s suit? Even if Goldman is cleared, the mud will stick. Every transaction will be suspect and every offer and pricing questioned.
Goldman shares fell 13% following the announcement (they were down 15% at one stage), wiping out $US12 billion of market cap.
Shares of Deutsche Bank, another big player in the structured securities markets of the bubble era, slid 8%, while the shares of other majors like JP Morgan, Citigroup and Morgan Stanley fell by 3% to more than 5%.
As Fortune magazine commented "Investors all over Wall Street heard the footsteps of an apparently revitalized federal law enforcement apparatus.
"This litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another," Chris Whalen, a bank analyst at Institutional Risk Analytics, said in a note to clients Friday and reported by Fortune.
Goldman Sachs issued two statements Friday, the second was a detailed attempt to rebut the SEC civil charges.
If the SEC is supported in court, then Goldman will be badly damaged, business will fall away, and its reputation may be gone.
If that happens, let’s hope central banks around the world have their safety nets in plac
