FSA launches Goldman Sachs investigation
April 19 2010, 4:37 pm
It is being reported that the FSA are to look into the UK activities of the beleaguered Wall Street bank which the US regulator has accused of a $1bn fraud, and now has to contemplate an unprecedented class action lawsuit on an epic scale.
The Embattled Wall Street firm Goldman Sachs is now facing an investigation by the City watchdog, the Financial Services Authority, following the $1bn (£650m) fraud allegations brought by the US regulators.
Their defence?
Goldman Sachs insisted its actions were “entirely appropriate” and that it would “vigorously contest” the charges brought by the US Securities and Exchange Commission (SEC).
The statement comes ahead of the bank’s first-quarter results tomorrow, which are expected to show it has been able to earmark $5bn for staff pay and bonuses.
Goldman believes the charges are politically motivated and come at a time when President Barack Obama is trying to force through legislative changes to clean up the US banking industry, which may lead to further securities class actions.
Action across the pond!
The FSA confirmed today that it was investigating the events. “As you would expect the FSA is investigating the circumstances of this case and whether there are any implications for the UK-regulated entities of Goldman Sachs.
If there are, we will take appropriate action. We are working closely with overseas regulators and will co-operate fully with the SEC investigation” the FSA said.
In a detailed statement today, Goldman stepped up its defence. It said: “Based on all that we have learned, we believe that the firm’s actions were entirely appropriate, and will take all steps necessary to defend the firm and its reputation by making the true facts known.”
What are the charges?
The SEC’s 22-page suit charges Goldman with working with US hedge fund, Paulson & Co, to structure and sell a complex package of mortgages to clients while Paulson took a “short” position betting that the same mortgages would fail.
The mortgages were packaged into a collateralised debt obligation (CDO) – the instruments at the heart of the 2007 credit crisis – and lost investors more than $1bn in just nine months. During the same period, Paulson made a similar amount in profit. The SEC asserts that Goldman did not disclose Paulson was on the other side the transaction.
Tip of the Iceberg?
Analysts say that the case against Goldman could be the tip of a class action iceberg. A Dutch bank, Rabobank, accused Merrill Lynch over the weekend of a similar misdemeanour, claiming that Merrill marketed a collateralised debt obligation (CDO) while omitting to mention its relationship with a hedge fund betting against the product’s success, resulting in a loss of $45m. Merrill called the allegation “unfounded”.
Merrill, Citigroup and Deutsche Bank were the top three writers of mortgage-related CDOs in 2006 and 2007. All three banks saw their stock drop by more than 5% when the SEC (Securities and Exchange Commission) announced charges against Goldman on Friday.
Conclusion
The charges against Goldman Sachs are, for most, a welcome sight because of their dishonesty to investors and clients alike. Hopefully the case against the bank is a strong one with irrefutable evidence.
However there is no doubt Goldman Sachs will do everything they can to defend themselves. They will use all their cunning to try and once again sell us a story of innocence. Don’t believe it!
