Goldman's $3.3B profit doesn't end firm's woes
4/21/2010NEW YORK - Goldman Sachs Group Inc. is still the king of Wall Street - at least when it comes to making money.
Four days after the government accused the firm of fraud in the subprime mortgage mess, the investment bank yesterday reported blowout first-quarter profits of $3.3 billion, nearly double from the same period in 2009. But it didn't get to celebrate.
Instead, Goldman spent the day defending itself against the Securities and Exchange Commission's charges and watching as its troubles mounted.
Britain's financial regulator began to probe the bank's London-based international operations. The European Commission called for tighter regulation of the financial investments at the heart of the SEC's case. And investors brushed off Goldman's earnings, sending its stock falling more than 2 percent. In three days, the firm's market value has fallen by nearly $13 billion.
Jack Ablin, chief investment officer at Harris Private Bank in Chicago, said he couldn't recall another time when a firm reported such stellar earnings only to see its stock fall.
In conference calls with industry analysts and reporters yesterday, Goldman Sachs officials were asked more questions about the charges than on the earnings.
The charges grew out of a 2007 transaction involving collateralized debt obligations, or CDOs, complex mortgage-related securities that many analysts say helped accelerate the financial crisis and recession when they plunged in value. The government said Goldman did not tell two clients that the CDOs they bought were crafted in part by billionaire hedge fund manager John Paulson, who was betting on them to fail. Goldman has denied the charge.
"Clearly, there's a potential for things to get worse," market analyst Edward Yardeni said, citing the widening probe of the bank's dealings. "The question is how will their clients react."
Political overtones are growing in the case, which comes as Congress debates the Obama Administration's proposal to overhaul the nation's financial rules.
The SEC approved the charges by 3-2, people familiar with the case said. The party-line split, with both Republican commissioners voting to hold back, are rare, ex-SEC officials said.
On Capitol Hill, SEC Chairman Mary Schapiro yesterday denied that the charges against Goldman were politically motivated.
But Mr. Ablin said the timing and the party-line split raise questions about whether the case against Goldman is aimed at swaying support for the administration's plan for tighter controls on Wall Street. "To me, this case is less about Goldman and more about financial reform," he said.