Goldman Sachs to face further investigation over fraud claims

PM urges Financial Services Authority to study deals involving Wall Street bank
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The Independent Online

Goldman Sachs was yesterday accused of "moral bankruptcy" by Gordon Brown, who called on financial regulators to launch a "special investigation" into allegations that the giant Wall Street bank fraudulently sold financial products to favoured clients.

The Prime Minister's comments come after the US financial regulator, the Securities and Exchange Commission (SEC), accused the bank of fraud. Goldman, which was last year described as "doing God's work" by its chief executive Lloyd Blankfein, is alleged to have sold a subprime debt product created for a hedge fund that had a financial interest in seeing the market collapse.

Ordinary investors lost $1bn (£650m) after being advised to invest in subprime products by the bank, while the hedge fund manager, Paulson & Co, made $1bn by betting the other way, also on Goldman's advice. The collapse of the subprime mortgage market in 2008 sparked a financial crash that has since led to the deepest recession since the Second World War.

"There is a moral bankruptcy reflected in what I am reading about and hearing about," Mr Brown said. "I want a special investigation done into the entanglement of Goldman Sachs and the companies there with other banks and what happened. Hundreds of millions of pounds have been traded here and it looks as if people were misled about what happened. I want the Financial Services Authority to investigate it."

The FSA refused to comment on the case, while politicians of other parties called for a UK inquiry. "Serious allegations of abuse in the large financial institutions should be pursued just as rigorously as the small fry," said Vince Cable, the Liberal Democrats' Treasury spokesman.

Dutch bank ABN Amro, which was subsequently bought by Royal Bank of Scotland (RBS) in a transaction that contributed to the near collapse of the British bank, is thought to have lost £545m when a subprime bond it bought turned toxic.

RBS required a huge government rescue package to prevent it going bankrupt, costing the UK taxpayer billions of pounds. RBS, now 84 per cent owned by the state, refused to comment yesterday, but sources close to the bank suggested that it may pursue Goldman in the courts if the fraud allegation is substantiated. It is likely to come under intense political pressure to go to court after Mr Brown said he believes "the banks themselves will be considering legal action" over what happened.

Whether or not the investigations on either side of the Atlantic lead to censure, the scandal is hugely embarrassing for Goldman, which is set to report bumper profits this week. The bank is expected to say that it made as much as $4bn in profits during the first three months of the year, double the amount it made in the first quarter of 2009.

The 130-year-old Wall Street behemoth managed to evade the worst of the financial crisis, and was happy to promulgate the theory that its performance was due to its superior practices – a thesis that now lies in tatters.

The bank has denied any wrong-doing, issuing two statements over the weekend. It said Paulson had paid $15m to the bank for structuring the instruments, known as Abacus 2007-AC1, but added that Goldman has lost more than $90m on the transactions.

"We are disappointed that the SEC would bring this action related to a single transaction in the face of an extensive record which establishes that the accusations are unfounded in law and fact," one statement read.

Sources close to Goldman accused British and US politicians of scoring "easy political points". Last year, Mr Blankfein said that the bank was "absolutely anal" about trading conflicts.

The Goldman banker at the centre of the crisis, Fabrice Tourre, is alleged to have told investors in 2007 that Paulson was buying into the subprime instruments, when in fact it was buying the Abacus product to short them. Mr Tourre, a 31-year-old French national, has worked at Goldman's London headquarters since 2008. There is no suggestion that Paulson & Co acted improperly.

The Independent on Sunday reported yesterday that Goldman had failed to tell the FSA that Mr Tourre was under investigation when the bank was first informed of the SEC inquiry in July 2009. To work in prominent financial services roles, such as managing client investment portfolios, individuals must be approved on the FSA's public register. Mr Tourre was approved on 24 November 2008. Sources close to Goldman said yesterday that the "bank had decided it was unnecessary to inform the FSA, believing there had been no wrongdoing."

Mr Tourre could not be reached for comment.

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