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

Stephen Foley,Associate Business Editor
Wednesday 21 April 2010 00:00 BST
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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!!!"

Mr Tourre is personally accused of fraud, and of misleading Abacus investors by telling them that Paulson was going to be an investor, too – something Goldman denies he said.

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