Record profit for Goldman as it comes out fighting on fraud charges
Earnings hit $3.46bn during first quarter after bank puts $5.49bn aside for bonus payments
Goldman Sachs is trying to limit the fallout from fraud charges laid against it, insisting that clients are standing by the firm and that the charges are a "narrow" matter of "he said, she said" which are "not broadly applicable" to the rest of its business.
With regulators in the UK now also taking an interest in the controversial mortgage deal at the heart of the case, the bank yesterday made public more details which it hopes will persuade clients that it did not dupe some investors in order to win large fees from a favoured hedge fund client.
The Securities and Exchange Commission's civil charges came after the end of a financial quarter in which Goldman was once again the king of Wall Street, but threaten to do major damage to its reputation.
The bank earned a record $3.46bn (£2.25bn) in the first three months of the year, and was bringing in revenues at the rate of $1m every 10 minutes. It has begun to accumulate reserves to pay its bumper year-end bonuses, and set aside $5.49bn for pay and benefits, representing $166,000 per employee by the end of March.
Goldman's executives have examined the outpouring of public and political support for the SEC's legal move last Friday, and opted for a fighting response. Senior executives have argued privately that the SEC's charges were timed to influence the debate in Congress over financial reform, in which the White House is pushing to crimp Wall Street profitability and to make the big banks pay for any future financial crises. It emerged yesterday that Goldman has hired Gregory Craig, the White House's former counsel, to lobby for it on Capitol Hill and with regulators.
The bank also put its co-general counsel, Greg Palm, on a conference call to deny it acted fraudulently in the months before the credit crisis broke in 2007. Mr Palm said the bank had not been contacted by the US Department of Justice, meaning there was no indication that more serious criminal charges could follow the SEC's civil action. And he outlined more of the defence that Goldman is likely to pursue, saying that it was not just the hedge fund, Paulson & Co, which had a hand in suggesting the structure of the controversial deal, but also the investors who ultimately lost money.
Investors including ABN Amro, which is now owned by Royal Bank of Scotland, lost $1bn when a mortgage investment vehicle called Abacus collapsed in value within months of its creation in 2007. Paulson & Co paid Goldman $15m to set up Abacus and played a key role in putting together the portfolio of mortgage-related securities that went into the vehicle, before betting against it. The SEC says Goldman failed to mention this when it was marketing Abacus. Paulson went on to make $1bn from its negative bet.
Paulson, whose suggestions included switching out mortgages from lenders known to have better underwriting standards, was over-ruled "more than half the time", Mr Palm said. IKB, a German bank that bought into Abacus, was given a chance to object to any of the securities and tried to remove "a couple... The fact that they made fewer suggestions than Paulson only tells you they were satisfied".
Mr Palm also said Goldman itself lost over $100m on the deal, suggesting it had no interest in seeing Abacus fail. However, he revealed that the bank had originally tried to find more investors and tried again to sell its holding later. This, he said, was "irrelevant" because Goldman would not have done the deal if it was not comfortable holding the stake.
He did not answer a question on why investors were not told Abacus was set up at the instigation of a hedge fund that wanted to bet against it.
Abacus was created in New York by Fabrice Tourre, a 31-year-old employee now based in London. Weeks before selling Abacus to investors, he wrote an email declaring his belief that the mortgage market was on the brink of disaster: "The whole building is about to collapse ... Only potential survivor, the fabulous Fab[rice]... standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!"
David Prosser: Goldman: the irresistible target for politicians with an election to win
Outlook So far, so good for Goldman Sachs. Not only did yesterday's robust first-quarter trading update suggest that the investment bank is recovering even more quickly than expected from the financial crisis, but there is also no reason to think the Government is about to give it the push from all those profitable contracts it currently enjoys with British taxpayers.
Indeed, Alistair Darling yesterday explicitly rejected the calls – first highlighted in The Independent – for the Treasury to sever links with Goldman because of the allegations of fraud it now faces. The Chancellor argued that the bank had been accused of fraud, but not yet found guilty.
One sees his point. But Mr Darling's boss doesn't seem to have too many doubts about Goldman's flaws. Appearing on television on Sunday, Gordon Brown was only too happy to talk tough on the bank, accusing it of "moral bankruptcy" and promising to "change the behaviour" of the City. Strong words, but can you simultaneously award a bank hugely valuable contracts and encourage a change in behaviour?
What certainly won't change Goldman's behaviour, by the way, is the tax on bankers' bonuses to which the Chancellor pointed when asked about the bank's award of $3.6bn to staff in the first quarter. As he surely knows, this is remuneration that won't actually be handed over until the end of the bank's year, by which time Mr Darling's one-off levy will be only a distant memory.
Still, the juxtaposition of words such as Goldman Sachs, bonus and fraud was always going to be manna in the middle of an election campaign. And given that both the Conservatives and the Liberal Democrats have been so quick to call for the Government to get rid of Goldman, we can presumably assume that both parties will do exactly that should they find themselves in office in a little over two weeks' time?
Seriously though, this sort of politicisation of the process of justice is deeply dangerous. The crowds are already baying for blood from the bankers; whipping up further fury for electoral gain is deeply irresponsible – and downright dishonest if you have no intention of following through on what you say.
It would be interesting to know, for example, what contact there has been between the Treasury and the Financial Services Authority over the past day or two. On Monday, the regulator said it was looking into the Goldman allegations – by yesterday, these inquiries had turned into a full-blown official investigation.
It isn't just our lot who play these games. The revelation yesterday in the US that the SEC commissioners were split, broadly along party political lines, on whether to proceed with formal charges against Goldman, gives some succour to the investment bank's case that it is being picked upon so publicly in order to help President Barack Obama's push for tighter financial regulation.
None of which is to defend Goldman, which clearly has some very serious charges to answer. It is, however, as entitled to the rest of us to an opportunity to defend itself – and until the bank has had its day in court, the politicians ought to go easy on their declarations of outrage.
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