Posted on 10 May 2010
Embattled Wall Street bank Goldman Sachs is edging close to accepting lesser charges and possibly involving an admission of negligence to settle a $1 billion fraud prosecution laid by US regulators last month.
An admission of failings by the bank, albeit far short of those alleged by the securities and exchange commission (SEC), would mark a substantial retreat from Goldman's defiant response to the regulator's civil fraud lawsuit, which it continues to argue is wrong "in fact and in law".
The SEC alleges that the bank misled investors over the controversial sale in 2007 of a $1bn derivative investment called Abacus tied to a package of mortgage loans.
The prospect of Goldman admitting to shortcomings comes only a week after the billionaire investor Warren Buffett, whose Berkshire Hathaway group has a major stake in Goldman, dismissed the SEC's charges as misguided. But the episode has left the bank struggling to protect its reputation.
Tentative talks about a deal are to continue this week after a meeting on Tuesday between Goldman's lawyer and the SEC that signaled the first chink in a previously cast-iron insistence by the bank that it would fight the allegations.
Some analysts have speculated that the total cost of a settlement could be as much as $1bn, making it one of the largest in US history. The Wall Street Journal last week reported that some executives and powerful alumni of Goldman are discussing whether the bank's chairman, Lloyd Blankfein, should resign to restore confidence in the company.
While Goldman is adamantly refusing to accept any charge of fraud over its Abacus mortgage deal, it is anxious for a swift resolution of the case and is willing to countenance a more modest accusation, possibly along the lines of negligence or poor administrative processes.
Goldman is concerned about an ongoing avalanche of bad publicity and a slide in its stock, which has fallen by 22% since the SEC laid charges in mid-April. But the SEC is in less of a hurry, wary that if it backs down, it could face public and political hostility for weakness against an institution with powerful connections.
The SEC claims that Goldman misled investors in Abacus by failing to come clean about the role of a hedge fund, Paulson & Co, that was going "short" to bet on Abacus slumping in value. The security duly dived as US housing prices slumped, leaving Royal Bank of Scotland, which backstopped liabilities, with a bill of $840m.
The US department of justice is examining possible criminal charges against Goldman and, in Britain, the Financial Services Authority is looking into the deal. Any admission of failures in a potential civil settlement will have to be carefully worded if it is not to influence a criminal investigation. Adding to Goldman's woes, the bank has faced a flurry of lawsuits from shareholders who claim they should have been told earlier of an SEC probe.
Yet in spite of the controversy, investors gave overwhelming backing to Blankfein at Friday's annual meeting by re-electing him with 95% of the vote.
A resolution calling for a slimming down of his role through a split between the jobs of chairman and chief executive captured a modest 19%, below the support gained by similar motions at other top US companies.Last week Buffett told an annual meeting of Berkshire Hathaway shareholders: "I don't hold it against Goldman at all, the fact that allegations have been made by the US Securities and Exchange Commission." He said he was "100%" behind Blankfein and "loved" his $5bn holding in Goldman.