Goldman fraud charge fallout

Goldman Sachs Group Inc faces
rising regulatory and legal pressure as allegations that the bank duped
clients’ fuelled momentum for regulatory reform on both sides of the Atlantic.

The U.S. Securities and Exchange
Commission charged Goldman over its marketing of a subprime mortgage product,
igniting a battle between Wall Street’s most powerful bank and the top
securities regulator. Goldman has denied the fraud charges.

“If nothing else, higher
regulatory scrutiny could lead to a more cautious work force at Goldman and
curtail future revenue generation if it persists,” analysts at FBR
Research said in a research note. The firm removed Goldman from its “top
picks” list.

The civil fraud case cast a shadow
over what had been expected to be a blockbuster earnings announcement from
Goldman today. The 141-year-old bank for the first time said its co-general
counsel, Greg Palm, would join its earnings call alongside Chief Financial
Officer David Viniar.

In a sign that there might not be
an immediate wave of similar cases, CNBC reported that a former lieutenant of
hedge fund manager John Paulson had told investors that he did only one deal of
the type in the Goldman case. The SEC alleges that Goldman created the synthetic
collateralized debt obligation in question at Paulson’s behest, and that
Paulson made millions by betting against it.

The SEC has said investors were
kept in the dark about the fact that Paulson was shorting the CDO. One of those
investors, German bank IKB, said it was reviewing all of its financial
transactions in the run-up to the crisis. The bank said it might consider
taking legal steps but had no grounds for action so far.

Britain and Germany said they could
also pursue Goldman. The UK financial regulator said it was looking at the
circumstances of the SEC’s charges, as was Germany’s BaFin, which said it was
considering possible damage claims.

In the United States, Democrats
tried to use the Goldman allegations to their advantage as they press for congressional
approval of the most sweeping package of financial regulatory reforms since the
Great Depression.

And EU market regulation chief
Michel Barnier said that if Goldman was found to have committed fraud, it would
reinforce the need for Europe to act to regulate derivatives.