British regulator launches Goldman Sachs investigation
Wednesday, April 21, 2010
LONDON -- Goldman Sachs's woes in Europe heightened Tuesday as British regulators launched a formal investigation into its London operations in connection with a U.S. case alleging that the firm sold investments secretly intended to backfire on their buyers.
The Financial Services Authority, Britain's chief financial regulator, was initially focusing on Fabrice Tourre, the 31-year-old, high-flying investment banker described by the U.S. Securities and Exchange Commission as "principally responsible" for putting together the deals, according to sources familiar the matter. Tourre, who the firm said was on voluntary leave as of Tuesday, was transferred from New York to the firm's London office in November 2008.
But amid mounting concern in Britain over Goldman's activities, FSA regulators are also set to dig deeper into the bank's global structured products operations based out of London's financial district. "You see one problem; there might be more. And some of them might be in your own wood pile," said Richard Portes, president of the Center for Economic Policy Research in London. "What the FSA is saying is that it is now going to take a look at Goldman."
On both sides of the Atlantic, the spotlight has been turning on this most storied of Wall Street banks as never before. Goldman, long the envy of investment banking, emerged from the financial crisis faster and stronger than other major financial firms. While several of its fellow investment houses collapsed or were bought, Goldman barely missed a beat, quickly returning to profitability, and on Tuesday it reported that its first-quarter earnings had nearly doubled from a year ago, outstripping analysts' expectations to reach $3.3 billion.
But as profits have mounted, so have political and legal troubles. Goldman has taken a pounding from U.S. lawmakers and the public for paying out billions of dollars in executive bonuses in 2009, even as the bank was benefiting from government rescue programs designed to stabilize the financial system. The firm's role in the collapse of insurance giant American International Group and the Greek debt crisis now threatening Europe also have come in for stinging criticism.
Goldman is facing various legal challenges, including lawsuits by shareholders who accuse the company of breach of duty in connection with the outsize executive paydays. The Federal Reserve is examining the firm's role in the Greek crisis, and a congressional committee is investigating accusations that Goldman sold securities backed by subprime mortgages while betting against them.
Even Goldman's traditionally close ties to Democratic and Republican administrations have become a liability, with politicians from both parties lining up to cudgel a bank that has come to symbolize Wall Street excess.
"They have to expect what they're getting because the criticism, when there is a crisis, is always directed at the top," said Charles Geisst, a Wall Street historian and finance professor at Manhattan College. "But in this case, it will impact its business because they have been charged with defrauding investors, which is the most damning charge a Wall Street firm could face. . . . That may cost them seriously."
The bank is already facing a firestorm in Europe because the soured investments have caused hundreds of millions of dollars in losses to European banks, which British and German taxpayers eventually bailed out. Influential opposition politicians and trade unions are calling for the firm to be banned from lucrative government contracts, while calls are escalating for new rules requiring greater openness about the details of complex financial instruments.
German authorities said Tuesday that they were "intensifying" talks with the SEC about the Goldman case as they weigh a formal inquiry.
Legal experts warned that any finding of wrongdoing against Goldman could expose the firm to massive lawsuits from its clients. Sources at the Royal Bank of Scotland -- which lost $840 million in the Goldman deal -- said the bank was watching the SEC case closely and had not decided whether to file suit. But the possibility that the bank, now 84 percent state-owned, might recoup some losses in the courts sent its stock up 4.3 percent Tuesday.
The SEC lawsuit filed Friday alleges that Goldman sold a mortgage-related investment in 2007 to investors without telling them that Paulson & Co., a prominent hedge fund, had helped assemble it while placing bets it would lose value. The bank received $15 million from Paulson for its services. Goldman has denied wrongdoing.
Tourre takes leave
Allegedly at the center of the business deal was Tourre, a French-born Goldman vice president whose e-mail exchanges with friends were presented as evidence by the SEC. A familiar face at upscale London clubs and bars, Tourre on Tuesday became the subject of a British news media manhunt, with journalists staking out his lavish flat near the Sadler's Wells theater in London. As of late Tuesday, he had failed to turn up.
A Goldman spokeswoman said Tourre had taken an indefinite, voluntary leave with pay. In Britain, legal questions center on his transfer from Wall Street to Fleet Street in November 2008, about three months after the SEC launched its probe. Under normal procedures, British authorities are to be notified by a financial company when a trader facing investigation is transferred to the country. Sources familiar with the Goldman case said the company did not disclose the SEC probe.
In a statement, Goldman said Tourre had not been singled out by the SEC at the time of his transfer to London. The company added that it had conducted an internal investigation into his actions and cleared him of any wrongdoing.
"We believe the SEC's charges are completely unfounded in law and fact and look forward to cooperating with the FSA," the company said in a statement.
Both British and German authorities were analyzing the extent of their jurisdiction in the case. RBS, for instance, lost money on the deal because of its purchase of ABN Amro, a Dutch bank it bought at the height of the credit bubble in 2007. In Germany, IKB Deutsche Industriebank AG lost $150 million on the investments. Those losses were part of far larger problems at both banks, requiring massive government bailouts during the financial crisis.
If Goldman's offices in New York, rather than its offices in London or Frankfurt, were used as the base for marketing and selling the transactions to European clients, the case might rest outside the purview of European regulators. Rather, analysts say, it could become a springboard for regulators to see whether similar deals were being put together and sold in Europe.
In addition, with anger against bankers figuring high in the heat of a national election campaign in Britain, politicians were eager to make an example out of Goldman. Prime Minster Gordon Brown said the case showed a "moral bankruptcy on the part of employees" at the firm, while one of the challengers, Nicholas Clegg of the resurgent Liberal Democratic Party, called for Goldman to be banned from doing business with the British government, pending the outcome of the investigation.
"They are a reminder of the recklessness and greed that have disfigured the banking industry as a whole," said Clegg, whose ratings have soared in opinion polls. "We believe that Goldman Sachs should now be suspended in its role as one of the advisers to the government until these allegations are properly looked into."
Staff writer Tomoeh Murakami Tse in New York contributed to this report.