Under-fire Goldman Sachs reveals 90% jump in profits

by Andrew Clark

The under-fire Wall Street bank Goldman Sachs [1] faced a fresh barrage of public and political outcry today as it revealed a 90% leap in profits in spite of accusations of dishonesty in its dealing with clients, raising the spectre of multimillion dollar bonuses at the height of a battle in Washington over regulatory reform.

Just days after US regulators began a $1bn (£650m) fraud action against the firm, Goldman revealed a leap in quarterly profits from $1.8bn to $3.5bn [2] and disclosed that it was setting aside $5.49bn to pay its employees. A top lawyer at the bank rebutted the Securities and Exchange Commission's prosecution, insisting Goldman had not misled its clients and describing the case as a "he says, she says" dispute.

Goldman's figures were given short shrift by the White House, which is preparing for a fresh push on Wall Street on Thursday when Barack Obama will visit New York to deliver a speech pressing the case for a crackdown on the financial industry.

A senior economic adviser to the White House, Austan Goolsbee, suggested banks such as Goldman should admit that their soaring profits had been aided by the US government "stepping up and preventing them all from falling off a cliff".

Goolsbee said: "Before they all pat themselves on the back for the great job they did and get a big bonus based on their profits, somebody ought to recognise that a great deal of their profit came from financial interventions from the government to save their bacon."

In Britain, the Financial Services Authority escalated its scrutiny of Goldman [3] to a formal investigation, joining the SEC's probe into a mortgage-related security overseen in 2007 by a London-based Goldman banker, Patrice Tourre [4], which was allegedly packed deliberately with toxic homeloans, yielding a huge profit for a hedge fund that bet on its failure.

On the election trail, the chancellor, Alistair Darling, weighed in, remarking that the accusations "almost beggar belief". But Darling rejected calls from the Conservatives for an immediate block on any government work with Goldman, saying: "I don't think you can stop doing business with a firm because an individual is accused of doing something."

At the core of the case against Goldman is an allegation that a hedge fund, Paulson & Co, played a key role in selecting the mortgages packed into a collateralised debt obligation named Abacus, which was then sold to clients by the bank. Because Paulson intended to take a "short" position, it had a vested interest in choosing mortgages likely to default. Within nine months, 99% of the homeloans in the package had indeed been downgraded, leaving Royal Bank of Scotland, which insured the deal against failure, with an $840m bill.

Goldman's co-general counsel, Gregory Palm, insisted that Paulson did not choose the mortgages in the package but merely made "suggestions" to financial consulting firm ACA Management, which became a big investor in Abacus.

"Paulson did not select the portfolio, ACA did," said Palm, who repeatedly denied any wrongdoing. "If we had evidence that someone was trying to mislead someone, that's not something we'd condone at all. We'd take action."

Quizzed by media on a conference call, Palm characterised the lawsuit as a "factual dispute" revolving around different individuals' recollection of events: "When you go to the core of the SEC case and look at it, it revolves a little around 'he says, she says'."

The prosecution of Goldman is quickly becoming a contentious political issue in the US. The SEC has taken action just as the Obama administration tries to force a tightening of Wall Street regulation through Congress in spite of Republican objections.

In a sign of a partisan split, it emerged today that the five-member governing board of the SEC voted 3-2 in favour of action against Goldman, with two Democrats favouring prosecution but the SEC's two Bush-appointed Republican commissioners voting against. The SEC's chairman, Mary Schapiro, a political independent, provided the casting vote.

Keen to mount the most aggressive possible defence, Goldman has hired a heavy hitting former White House counsel, Gregory Craig, to provide legal advice. Craig worked for the Obama administration until November, and during the 1990s he served as special counsel defending Bill Clinton against impeachment.

Goldman's profits were not sufficient to stem a steady decline in its share price, which dropped 1% in early trading on Wall Street. Jacob Frenkel, a former SEC lawyer now in private practice, said most cases of the type facing Goldman were quietly settled but that the regulator seemed determined to deliver a powerful enforcement message at a politically sensitive time, leaving Goldman with no choice but to fight: "At this point, there's no downside for Goldman in jumping in the ring and going at it for a few rounds."

 

by Andrew Clark
The under-fire Wall Street bank Goldman Sachs [1] faced a fresh barrage of public and political outcry today as it revealed a 90% leap in profits in spite of accusations of dishonesty in its dealing with clients, raising the spectre of multimillion dollar bonuses at the height of a battle in Washington over regulatory reform.
Just days after US regulators began a $1bn (£650m) fraud action against the firm, Goldman revealed a leap in quarterly profits from $1.8bn to $3.5bn [2] and disclosed that it was setting aside $5.49bn to pay its employees. A top lawyer at the bank rebutted the Securities and Exchange Commission's prosecution, insisting Goldman had not misled its clients and describing the case as a "he says, she says" dispute.
Goldman's figures were given short shrift by the White House, which is preparing for a fresh push on Wall Street on Thursday when Barack Obama will visit New York to deliver a speech pressing the case for a crackdown on the financial industry.
A senior economic adviser to the White House, Austan Goolsbee, suggested banks such as Goldman should admit that their soaring profits had been aided by the US government "stepping up and preventing them all from falling off a cliff".
Goolsbee said: "Before they all pat themselves on the back for the great job they did and get a big bonus based on their profits, somebody ought to recognise that a great deal of their profit came from financial interventions from the government to save their bacon."
In Britain, the Financial Services Authority escalated its scrutiny of Goldman [3] to a formal investigation, joining the SEC's probe into a mortgage-related security overseen in 2007 by a London-based Goldman banker, Patrice Tourre [4], which was allegedly packed deliberately with toxic homeloans, yielding a huge profit for a hedge fund that bet on its failure.
On the election trail, the chancellor, Alistair Darling, weighed in, remarking that the accusations "almost beggar belief". But Darling rejected calls from the Conservatives for an immediate block on any government work with Goldman, saying: "I don't think you can stop doing business with a firm because an individual is accused of doing something."
At the core of the case against Goldman is an allegation that a hedge fund, Paulson & Co, played a key role in selecting the mortgages packed into a collateralised debt obligation named Abacus, which was then sold to clients by the bank. Because Paulson intended to take a "short" position, it had a vested interest in choosing mortgages likely to default. Within nine months, 99% of the homeloans in the package had indeed been downgraded, leaving Royal Bank of Scotland, which insured the deal against failure, with an $840m bill.
Goldman's co-general counsel, Gregory Palm, insisted that Paulson did not choose the mortgages in the package but merely made "suggestions" to financial consulting firm ACA Management, which became a big investor in Abacus.
"Paulson did not select the portfolio, ACA did," said Palm, who repeatedly denied any wrongdoing. "If we had evidence that someone was trying to mislead someone, that's not something we'd condone at all. We'd take action."
Quizzed by media on a conference call, Palm characterised the lawsuit as a "factual dispute" revolving around different individuals' recollection of events: "When you go to the core of the SEC case and look at it, it revolves a little around 'he says, she says'."
The prosecution of Goldman is quickly becoming a contentious political issue in the US. The SEC has taken action just as the Obama administration tries to force a tightening of Wall Street regulation through Congress in spite of Republican objections.
In a sign of a partisan split, it emerged today that the five-member governing board of the SEC voted 3-2 in favour of action against Goldman, with two Democrats favouring prosecution but the SEC's two Bush-appointed Republican commissioners voting against. The SEC's chairman, Mary Schapiro, a political independent, provided the casting vote.
Keen to mount the most aggressive possible defence, Goldman has hired a heavy hitting former White House counsel, Gregory Craig, to provide legal advice. Craig worked for the Obama administration until November, and during the 1990s he served as special counsel defending Bill Clinton against impeachment.
Goldman's profits were not sufficient to stem a steady decline in its share price, which dropped 1% in early trading on Wall Street. Jacob Frenkel, a former SEC lawyer now in private practice, said most cases of the type facing Goldman were quietly settled but that the regulator seemed determined to deliver a powerful enforcement message at a politically sensitive time, leaving Goldman with no choice but to fight: "At this point, there's no downside for Goldman in jumping in the ring and going at it for a few rounds."