NEW YORK — Goldman Sachs stepped up its defense against civil fraud charges Monday, telling clients it did not withhold information in a complex transaction involving risky mortgage securities.
But a big question was: Will other big investment banks face similar charges?
In a letter to clients, Goldman Sachs vowed to fight the government’s charges that the bank and one of its vice presidents misled investors by selling complex financial products tied to mortgages that were expected to fail. Goldman Sachs and the vice president, Fabrice Tourre, were named in the Securities and Exchange Commission lawsuit Friday.
The SEC charged that Goldman Sachs did not tell two clients that the investments they bought were crafted by billionaire hedge-fund manager John Paulson, who was betting on them to fail.
The bank fought back against the government’s charges, saying, “The SEC does not contend that the two professional institutional investors involved did not know what they were buying, or that the securities included in this privately placed transaction were in anyway improper.”
The two investors, German bank IKB Deutsche Industriebank AG and financial consulting firm ACA Management, “were provided extensive information about those securities and knew the associated risks,” Goldman Sachs said.
Wall Street “full of copycats”
Meanwhile, many observers, believing that other banks were involved in similar deals, wondered whether more companies would be charged.
An SEC spokesman declined to say Monday whether firms other than Goldman Sachs are under investigation. But financial experts say it’s likely that other big names could find themselves being questioned.
“Wall Street is full of copycats,” said John Coffee, a securities-law professor at Columbia Law School. “Once you know which deals you’re talking about, it’s not hard to see who else was doing it.”
At the height of the housing boom, several big banks were busy packaging and selling investments tied to mortgage securities to meet investor demand. Such securities, called synthetic collateralized debt obligations, or CDOs, reaped huge fees for banks but later were blamed for creating the credit crisis and worsening the recession.
Among the biggest sellers of CDOs were Merrill Lynch, now part of Bank of America; Citigroup; Swiss banking giant UBS; and German bank Deutsche Bank, according to a banking-industry official with knowledge of the transactions. He spoke on condition of anonymity because he wasn’t authorized to publicly discuss the banks’ dealings.
Citigroup denied any involvement in the transaction Goldman Sachs is charged in connection with. But Citigroup said it has talked with the SEC during the agency’s industrywide probe of the role of derivatives in the financial crisis.
At issue
Civil charges lodged last week by the Securities and Exchange Commission against Wall Street power-house Goldman Sachs involve whether Goldman adequately informed buyers that another client helped pick securities linked to the investment, with the goal of profiting if their value declined. Congressional Democrats, including Senate Banking Committee chief Christopher Dodd, D-Conn., above, look to the suit to help a push for new regulations.
Impact
Investors bought stocks Monday after some concerns eased about the case against Goldman Sachs and it was revealed that the SEC vote to file a suit was 3-2. Stocks dropped Friday after the SEC announced its civil case.
Earnings
Citigroup, with shares up 32 cents at $4.88, said trading of bonds, stocks and other securities led it to a surprise first- quarter profit of $4.4 billion.
