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UK launches probe of Goldman Sachs

Published:Wednesday | April 21, 2010 | 4:00 AM

Britain's financial regulator launched a full-blown investigation into Goldman Sachs International on Tuesday, after United States authorities filed civil fraud charges against its parent bank.

The announcement from the Financial Services Authority follows pressure for the probe from British Prime Minister Gordon Brown, who expressed shock over the weekend at Goldman's "moral bankruptcy".

The British regulator said it would liaise closely with the US Securities and Exchange Commission (SEC), which alleges that the bank sold risky mortgage-based investments, without telling buyers that the securities were crafted in part by a billionaire hedge fund manager who was betting on them to fail.

The London-headquartered Goldman Sachs International, a principal subsidiary of Goldman Sachs Group Inc, said that "the SEC's charges are completely unfounded in law and fact." It said it looks "forward to cooperating with the FSA."

British interest in the case is likely to focus on the Royal Bank of Scotland, which paid US$841 million to Goldman Sachs in 2007, to unwind its position in a fund acquired in the takeover of Dutch bank ABN Amro, according to the complaint filed in the United States.

The government holds an 84 per cent stake in RBS, which nearly collapsed in large part because of its leadership of the consortium which took over the Dutch bank.

Fabrice Tourre, a Goldman Sachs vice-president who was named in the SEC lawsuit, was promoted and moved to the bank's London office to become executive director of Goldman Sachs International in London at the end of 2008.

Voluntary time off

The bank said Tuesday that Tourre, 31, is taking a break from his current position.

"It is voluntary. He decided to take some time off," Goldman Sachs spokesman Michael Duvally said.

Analysts warn that damage from the case could hit other big banks as well, as the Goldman lawsuit puts the spotlight on the sector's activities in the wake of the financial crisis.

Brown's anger was fuelled by reports over the weekend that Goldman Sachs still intended to pay out £3.5 billion (US$5.4 billion) in bonuses.

Goldman Sachs Group said Tuesday that its first-quarter earnings almost doubled to US$3.3 billion, as its trading business again surpassed the rest of the financial industry.

Goldman Sachs earned US$5.59 a share on revenue of US$12.78 billion, as bond, commodities and currency trading buoyed its profits for yet another quarter. That was well above expectations of analysts surveyed by Reuters Thomson.

The company said it set aside 43 per cent of revenue in the first three months of the year to pay employee salaries and bonuses, down from 50 per cent for the same period last year.

However, the actual amount for compensation set aside in the quarter rose 17 per cent from last year to US$5.5 billion.

Goldman CEO Lloyd Blankfein in a statement thanked the bank's supporters without specifically mentioning the SEC case.

"In light of recent events involving the firm, we appreciate the support of our clients and shareholders, and the dedication and commitment of our people," he said.

Brown, who is facing a tough general election on May 6, said that the activities of banks "are still an issue".

"They are a risk to the economy," he said. "We have got to make sure they behave in a proper way."

The opposition Conservative and Liberal Democrat parties called on the British leader to suspend Goldman from government work until the investigations are completed.

- AP