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Goldman Sachs: our side of the story

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21st Apr 2010
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Goldman Sachs has asked the Financial Services Authority (FSA) to remove Frenchman Fabrice Tourre from their list of 'approved persons' who can work as a trader in the UK as the controversy around the bank spreads even as it reports bumper quarterly results. 
In the US, the Securities and Exchange Commission (SEC) has begun a probe into allegations that Goldman Sachs misled clients on a sub-prime investment deal. The FSA has found sufficient evidence to open its own formal probe into Goldman's activities, and will be gathering evidence from the bank, its clients and associates.
Goldman used the announcement of better-than-expected net earnings of $3.5 billion in the first quarter to issue a forceful denial of the charges by the SEC. “We would never intentionally mislead anyone, certainly not our clients or a counter-party,” said Greg Palm, Goldman’s general counsel.
“We have never condoned and would never condone inappropriate behaviour by any of our people. On the contrary we would be the first to condemn it and to take all appropriate action. Our responsibility to the financial intermediary required and our commitment to our integrity and the firm’s business principles demand it.”
He added: “We do not in any way dispute the necessity and the importance of the SEC’s role in protecting investors and supporting fair, orderly and efficient markets. Our dispute is with regard to the respective views of the facts in this case and the applicable law.”
Palm said that Goldman Sachs had been working with the authorities since August 2008 when the SEC first asked for information on this transactions. “Over the past 18 months we have provided the staff with an extensive amount of documents and testimony related to our activities in the mortgage space generally and this transaction in particular,” he said. 
The allegations
The allegation result from the creation in 2007 by Goldman Sachs of a complex financial product, known as a “collateralised debt obligation” (CDO). This was effectively insurance against default for multiple tranches of highly dubious subprime mortgages – Abacus 2007-AC1. Goldman omitted to tell purchasers that Abacus had been put together largely at the direction of a hedge fund , Paulson Co, which was “shorting” it. When the mortgages covered by Abacus failed, investors lost $1 billion, the amount that Paulson Co made. 
Goldman Sachs claims it was not obliged to tell purchasers of Paulson’s role because it had used an “independent” intermediary, ACA, to create Abacus. “This was a transaction between institutional counter parties who well understood the risks they were taking,” insisted Palm. “There was never any representation that Paulson was to be a long equity investor in the transaction.
“[Goldman Sachs] had no economic motivation for this transaction to fail,” he added.  “A significant point missing from the SEC’s complaint was the fact that Goldman Sachs retained a significant residual long position in the transaction. Our overall losses in connection with the transaction exceeded $100 million including $83 million with respect to the retained long position. We certainly had no incentive to structure a transaction that was designed to lose money.”
Reassuring clients
While Goldman intends to contest the allegations, there's clearly a danger that the firm's brand will be damaged, although Palm said that efforts were underway to reassure clients.  “We are out talking to our clients,” he said. “Our view is our clients will support us as long as we provide very good service to our clients. That has been the key to our success. It has been the key to our success for a very, very long time. Our people through the entire financial practice are out talking with clients. We are out providing service to their clients. We are out driving prices and liquidity to their clients and we are still doing that. I think as long as we continue to perform for our clients they will be happy with us. If we stop performing for them then they won’t.”
It was an upbeat assessment echoed by CFO David Viniar.  “We believe our long-term success hinges on a core set of principles,” he said. “First and foremost we are focused on serving our client’s needs on a global basis with a diversified product portfolio. Second, given the importance of human capital to our success in meeting client needs we must recruit and retain the most talented people in our firm.  Third, we will continue to foster a culture of communication, long-term thinking, collaboration, flexibility and risk management excellence. Finally, we will strive to provide industry leading returns by combining these principles with a compensation structure that pays for performance and aligns employee interests to those who are other long-term stakeholders.”

While alluding to the fragility of the US economy, he added: “We believe financial institutions have a significant and critical role to play in promoting economic growth, jobs and wealth creation for society. Our business model and culture is consistent with these significant responsibilities. As a major participant in the financial markets we remain committed to supporting initiatives that improve the long-term stability of the global financial system. Thus we will continue to work with governments, regulators and peers across the world to strengthen standards and processes.” 

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By User deleted
21st Apr 2010 13:49

Goldman's interest in the transaction?

Perhaps Goldman could clarify whether their retained interest in these instruments - which lead to them suffereing many $millions of loss - were the result of a deliberate intention to retain the interest or just because they could not find enough 'informed investors' willing to take them off their hands?

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By User deleted
29th Apr 2010 12:30

Goldman Sachs is actually a financial cancer

The problem with Goldman Sachs is that their tentaclces a so invidious and far reaching that they seem to have a finger in just about every pie

This particular SEC investigation is only the tip of the iceberg so far as Goldman are concerned and there are many more areas where they should be held accountable for their financial chicanery

What about Greece and its current financial state - just see how Goldman contributed
http://www.spiegel.de/international/europe/0,1518,676634,00.html

The only real answer is for goverments worldwide to refuse to deal with them because Goldman themsleves have simply become devalued currency; whenever they are engaged in the future it will indicate the possibility of some 'smoke & mirrors' deal whereby Goldman are the only winners & everyone else pays the price

As with any cancer one has to take steps to cut it our of the system and Goldman Sachs is a very virulent form of disease

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