Goldman Sachs still under a microscope

Annemarie McAvoy in The Economic Times, July 28, 2010

NEW YORK: Goldman Sachs Group Inc has put SEC civil fraud charges to rest, but a host of regulators and lawmakers are still on its trail, leaving
the firm with headaches as it tries to move on.

A federal commission investigating the causes of the financial crisis has been among the most visible challengers, suggesting it could hire outside accountants to audit the data Goldman keeps on its derivatives businesses.

The Financial Crisis Inquiry Commission (FCIC) also obtained records showing that Goldman bought insurance from Citigroup and other banks against the risk that American International Group might fail.

The disclosure shows that Goldman depended on Citigroup and other weakened banks that themselves had large exposures to AIG, a US insurer that had to propped up with up to $182 billion of government aid. Details of those records were leaked to the media last week, giving new life to concerns that Goldman benefited from the government's rescue of AIG, and showing that the company's troubles with regulators and watchdogs are hardly in the past.

"They still have the target on their back and it is going to be a long time before that target comes off," said Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University.


On July 15 Goldman paid $550 million to settle civil fraud charges by the US Securities and Exchange Commission, ending a three-month ordeal that cost the company as much as $25 billion in market capitalization and led to calls to remove the firm's top brass. But even as the SEC case cleared the docket, probes from the US Department of Justice, New York Attorney General Andrew Cuomo, and the US Senate's Permanent Subcommittee on Investigations loomed.

Since initial optimism about the settlement, some investors have shied away from buying Goldman because of the fears about other probes. Goldman shares are up 1.9 percent since the settlement while the broader XBD index is up 2.4 percent. "It is probably holding the stock back," said Anton Schutz, president of Mendon Capital Advisors.

"There's a feeling that it is not all over. And that's not good. You would hope they achieve that with a settlement." Goldman Chief Financial Officer David Viniar told analysts last week that the company was not aware that it was the target of any criminal investigations.

"There is (not) a company in the world that does not have a threat of a criminal investigation at some point," Viniar said, adding, "All I can tell you is that we are not aware of any criminal investigation of Goldman Sachs." Goldman was part of a preliminary federal criminal investigation.

A source said in May that the investigation also included JPMorgan Chase & Co, Morgan Stanley, Citigroup Inc, Deutsche Bank AG, and UBS AG. A US Department of Justice spokesman declined to confirm or deny that a probe had ever existed.

Many observers now view the possibility of a criminal case against Goldman, always seen as a long shot, as even more remote. Annemarie McAvoy, a Fordham University School of Law professor and a former federal prosecutor, said weaknesses in the SEC's case make it unlikely that criminal prosecutors will bring charges against Goldman.

Prosecutors have found it difficult to successfully prosecute criminal cases stemming from the financial crisis because they must prove criminal intent to defraud or deceive. But more civil cases are quite possible, seeing that Goldman forked over more than half a billion dollars to settle a case that some considered weak.

"The New York state attorney general is not required to go along and drop his case simply because the SEC's case is settled," McAvoy said. "It might give him more of an impetus to proceed, because the SEC settled and got money." Even though Goldman has been under the microscope for the past several months, Viniar said it has not affected how senior managers are doing their job. "It certainly didn't feel to me like there was any lack of focus," Viniar said.


Goldman executives were lauded by investors for quickly settling the SEC charges and paying a relatively small sum, considering the bank's ability to rack up profits. Goldman reported a record profit of $13.4 billion in 2009 and paid $16.2 billion in bonuses and salary.

But Goldman officials must work quickly to resolve the other investigations to put clients at ease, said Michael Robinson, a financial and crisis public relations consultant with Levick Strategic Communications. "It has been open season on Goldman Sachs," Robinson said.

"To the extent they can bring things to an end as quickly as they can, it is especially helpful." After Goldman's reported weaker-than-expected second-quarter earnings last week, dragged down by the SEC settlement, Viniar told analysts that Goldman believed clients were standing behind the company through its troubles.

But Robinson stressed, "You don't know the deal you didn't get." "With CEOs and boards being really risk averse right now, Goldman stands to lose a great deal if there is still this overhang," Robinson said. "They need to get rid of it."