Goldman Sachs charges could be just the beginning
April 19, 2010
The effects of fraud charges against Goldman Sachs on Friday have reverberated across the globe, including the Aussie market which was down 1.4% by Monday afternoon.
Speculation this could be the start of another bear market have already surfaced as investors consume a number of negative factors including the EU debt crisis, falling commodity and forex markets, China’s efforts to slow growth and now the current problems with the aviation industry.
Equity markets have also reached 18-month highs in the past week prompting investors to consider booking their gains.
The lawsuit filed against Goldman Sachs and employee Fabrice Tourre by the US Securities Exchange Commission (“SEC”) alleges the bank made materially misleading statements and omissions in connection with a synthetic collateralised debt obligation based on sub-prime residential mortgage-backed securities.
It has been reported that investors, including Dutch bank ABN Amro, lost over US$ 1 billion on the product as a major hedge fund client of Goldman’s made a profit of a similar amount.
Goldman has since rejected the claims made against the company.
“The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation,” Goldman Sachs said in a statement released Friday.
Goldman bond salesman Fabrice Tourre is the only executive charged in the civil case, while John Paulson’s name has been dragged through the mud as it was his hedge fund that benefited from the deal by assisting to package the CDO and betting against it.
Mr Paulson and the hedge fund have not been charged as there was found to be no basis for doing so.
The SEC alleged Mr Tourre was principally responsible for the package and knew of Mr Paulson's undisclosed short interest and its role in the collateral selection process.
The SEC also said Tourre also misled ACA Management LLC into believing that Paulson invested approximately US$200 million in the equity of the CDO and, accordingly, that Paulson's interests in the collateral section process were aligned with ACA's when in reality Paulson's interests were sharply conflicting.
The announcement sent Goldman Sachs shares tumbling close to 13% Friday and saw the S&P/ASX futures down 48 points prior to the open of trade today.
The move raises the question as to whether or not this is only the start of things to come for US financial institutions.
Fears are already growing that tighter regulation could mark the end of the post-GFC rally and result in a large sell-off on global equity markets.
The US government vowed to crack down on the banks activities, particularly in relation to derivatives, and make sure they became more transparent.
If the accusations and scrutiny from the regulators, governments and media was not enough, Goldman will also need to defend itself to a public which has been out for blood on Wall Street ever since the sub-prime crisis came to a fore.
This has followed the companies ability to post strong results over the past 15-months after receiving benefits from government rescue packages and as a result hand out handsome bonuses to management and employees.
The possible outcomes are varied. Some are already questioning the merits of the case, while there is a strong chance Goldman Sachs could win a court battle, or afford any fine.
With the market already on a knife’s edge of a so-called correction it does appear the financial sector could lead the way south in the near term.
Goldman Sachs, which is set to release its first quarter earnings for 2010 tomorrow, reported fourth quarter net revenues of US$9.62 billion and net earnings of US$4.95 billion.
The company also said that net revenues were US$45.17 billion – just 2% lower than 2007’s record highs, while net earnings came in at US$13.39 billion.
Goldman Sachs this year has set aside US$16.2 billion, or 38% of revenue to pay its more than 32,000 staff members. This comes to just a tick under half a million each, on average, and a 57% jump on last year’s average salary.
Speculation this could be the start of another bear market have already surfaced as investors consume a number of negative factors including the EU debt crisis, falling commodity and forex markets, China’s efforts to slow growth and now the current problems with the aviation industry.
Equity markets have also reached 18-month highs in the past week prompting investors to consider booking their gains.
The lawsuit filed against Goldman Sachs and employee Fabrice Tourre by the US Securities Exchange Commission (“SEC”) alleges the bank made materially misleading statements and omissions in connection with a synthetic collateralised debt obligation based on sub-prime residential mortgage-backed securities.
It has been reported that investors, including Dutch bank ABN Amro, lost over US$ 1 billion on the product as a major hedge fund client of Goldman’s made a profit of a similar amount.
Goldman has since rejected the claims made against the company.
“The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation,” Goldman Sachs said in a statement released Friday.
Goldman bond salesman Fabrice Tourre is the only executive charged in the civil case, while John Paulson’s name has been dragged through the mud as it was his hedge fund that benefited from the deal by assisting to package the CDO and betting against it.
Mr Paulson and the hedge fund have not been charged as there was found to be no basis for doing so.
The SEC alleged Mr Tourre was principally responsible for the package and knew of Mr Paulson's undisclosed short interest and its role in the collateral selection process.
The SEC also said Tourre also misled ACA Management LLC into believing that Paulson invested approximately US$200 million in the equity of the CDO and, accordingly, that Paulson's interests in the collateral section process were aligned with ACA's when in reality Paulson's interests were sharply conflicting.
The announcement sent Goldman Sachs shares tumbling close to 13% Friday and saw the S&P/ASX futures down 48 points prior to the open of trade today.
The move raises the question as to whether or not this is only the start of things to come for US financial institutions.
Fears are already growing that tighter regulation could mark the end of the post-GFC rally and result in a large sell-off on global equity markets.
The US government vowed to crack down on the banks activities, particularly in relation to derivatives, and make sure they became more transparent.
If the accusations and scrutiny from the regulators, governments and media was not enough, Goldman will also need to defend itself to a public which has been out for blood on Wall Street ever since the sub-prime crisis came to a fore.
This has followed the companies ability to post strong results over the past 15-months after receiving benefits from government rescue packages and as a result hand out handsome bonuses to management and employees.
The possible outcomes are varied. Some are already questioning the merits of the case, while there is a strong chance Goldman Sachs could win a court battle, or afford any fine.
With the market already on a knife’s edge of a so-called correction it does appear the financial sector could lead the way south in the near term.
Goldman Sachs, which is set to release its first quarter earnings for 2010 tomorrow, reported fourth quarter net revenues of US$9.62 billion and net earnings of US$4.95 billion.
The company also said that net revenues were US$45.17 billion – just 2% lower than 2007’s record highs, while net earnings came in at US$13.39 billion.
Goldman Sachs this year has set aside US$16.2 billion, or 38% of revenue to pay its more than 32,000 staff members. This comes to just a tick under half a million each, on average, and a 57% jump on last year’s average salary.
Leave a Reply