Showing posts with label Goldman. Show all posts
Showing posts with label Goldman. Show all posts
Wednesday, February 29, 2012
Monday, February 6, 2012
Goldman to face mortgage debt class-action lawsuit (Reuters)
(Reuters) – Goldman Sachs Group Inc was ordered by a federal judge to face a securities class-action lawsuit accusing it of defrauding investors about a 2006 offering of securities backed by risky mortgage loans from a now-defunct lender.
U.S. District Judge Harold Baer in Manhattan certified a class-action lawsuit by investors led by the Public Employees' Retirement System of Mississippi.
These investors claimed they lost money in the GSAMP Trust 2006-S2, a $698 million offering of certificates backed by second-lien home loans made by New Century Financial Corp, a California subprime mortgage specialist that went bankrupt in 2007.
Thursday's decision is a setback for Goldman, which had sought to force investors to bring their cases individually.
Class certification lets investors pool resources, which can cut costs, and can lead to larger recoveries than if investors are forced to sue individually.
Goldman spokesman Michael Duvally declined to comment.
The bank is one of many accused by Congress, regulators and others of having fueled the nation's housing crisis and 2008 financial crisis in part by having misled investors about the quality of mortgage debt they sold.
Goldman in 2010 agreed to pay $550 million to settle U.S. Securities and Exchange Commission fraud charges over a collateralized debt obligation it sold, Abacus 2007-AC1 CDO.
"CREATIVE CUTTING AND PASTING"
The Mississippi fund claimed the GSAMP offering documents were false and misleading, saying Goldman's boilerplate disclosures failed to reveal how New Century had ignored its own underwriting standards and used inflated appraisals.
It blamed Goldman's poor due diligence for the bank's failure to find these problems when it bought New Century's loans and packaged them into securities.
Goldman countered that class-action status was inappropriate given the wide range of certificates offered, the differences among the "highly sophisticated institutional investors" that bought the debt, and even that some investors might have had "storm warnings" about New Century's practices.
Baer rejected the defense, even faulting Goldman's "creative cutting and pasting" of a 200-page deposition to bolster its claim that the Mississippi fund was on notice of problems.
"In light of my finding that the common issues predominate, it does not seem likely questions regarding individual investor knowledge, statutes of limitation or any other issue will become unmanageable," Baer wrote.
David Wales, a partner at Bernstein Litowitz Berger & Grossmann, which was named lead counsel, declined to discuss Baer's ruling, but said the plaintiffs plan to proceed toward a possible October trial.
The case is Public Employees' Retirement System of Mississippi v. Goldman Sachs Group Inc et al, U.S. District Court, Southern District of New York, No. 09-01110.
(Reporting By Jonathan Stempel in New York; Additional reporting by Alison Frankel; Editing by Phil Berlowitz)
Sunday, January 22, 2012
Senior Goldman bond executive retires: memo (Reuters)
(Reuters) – Donald Mullen, a senior bond executive at Goldman Sachs (GS.N) who oversaw controversial subprime mortgage trades leading up to the financial crisis, has retired, according to an internal memo distributed on Friday and obtained by Reuters.
His is the latest in a string of high-profile departures from the Wall Street bank, which has been struggling to maintain profits by cutting staff and bonuses in a weak business environment.
Mullen, a veteran bond trader who was most recently head of the credit and mortgage business inside Goldman's securities division, joined the bank as a partner in July 2001 to head leveraged finance.
He previously held senior positions at Bear Stearns, Salomon Brothers, Drexel Burnham Lambert and First Boston and leaves Goldman as a member of several influential internal groups, including the management committee and firmwide risk committee.
A spokesman confirmed the contents of the memo, which was signed by Chief Executive Lloyd Blankfein and Chief Operating Officer Gary Cohn.
As a senior mortgage executive at Goldman, Mullen was actively engaged in derivative trades that became known as "the big short." Goldman constructed those collateralized debt obligations in 2007 to profit from declines in the value of subprime mortgage bonds.
Mullen was one of a handful of senior Goldman executives whose emails were publicly released by a Senate committee that investigated Goldman's actions leading up to the financial crisis.
"Sounds like we will make some serious money," Mullen said when a ratings agency downgraded a group of mortgage-backed securities Goldman was betting against.
Such trades allowed Goldman to avoid major losses from the collapse of the mortgage market, but also brought much public scrutiny after the U.S. Securities and Exchange Commission accused Goldman of fraud related to one of its subprime CDOs. The bank paid $550 million to settle the charges in 2010 without admitting or denying wrongdoing.
Dozens of top Goldman executives have departed over the last year, as Wall Street faces difficult market conditions and new financial reform regulations that have already started to curb profitability. Last week, two co-heads of the securities division that housed Mullen's group also stepped down.
Goldman 2011 earnings of $2.5 billion were the weakest since 2008 and down 47 percent from the previous year. In response, the bank cut its payroll by 2,400 employees, or 7 percent, and reduced compensation expenses by 21 percent. The average Goldman employee received $367,057 in 2011, down from $430,700 the previous year.
Mullen's retirement announcement came the day after Goldman employees were informed of their 2011 bonuses, and few were spared from the bank's newfound frugality.
Some employees in weak-performing areas received no bonus at all, according to one source in the bank's fixed-income trading division. Compensation consultants have estimated that senior Wall Street executives, particularly in fixed-income divisions, were sure to see bonus cuts of 30 percent or more.
Mullen's departure may also reflect a change in the type of businesses that will drive earnings for Wall Street banks going forward. Morgan Stanley (MS.N), which also reported muted 2011 profitability this week, has cut staff from divisions that will be treated less favorably under new capital regulations, such as subprime debt securitization.
On a conference call with analysts to discuss Goldman's results on Wednesday, Chief Financial Officer David Viniar said the recent string of high-profile departures have occurred because senior executives stayed longer than usual to help Goldman cope with the financial crisis and its aftermath.
"Through both what I would call a financial crisis and reputational issues, the senior people at Goldman Sachs did not leave," he said.
The normal tenure of a Goldman partner is about eight years, Viniar said, with 15 to 20 percent of partners retiring bi-annually to make room for new arrivals. But there was "far less" turnover during the past four years, Viniar said.
(Reporting By Lauren Tara LaCapra; Additional reporting by Katya Wachtel; Editing by Paritosh Bansal and Gary Hill)
Sunday, September 11, 2011
New York prosecutors widen Goldman probe: report (Reuters)
(Reuters) – New York prosecutors are widening their investigation into the manner in which Goldman Sachs (GS.N) marketed certain mortgage-linked securities before the financial crisis, the Wall Street Journal reported, citing people familiar with the matter.
The Manhattan district attorney's office began its probe into Goldman following the release in April of a U.S. Senate subcommittee report into the causes of the financial crisis, the paper said.
The district attorney's office has issued subpoenas to Morgan Stanley (MS.N) and other investors in the deals. The prosecutor's requests to investors, including some hedge funds, concern how Goldman sold the deals, the Journal said.
Subpoenas do not indicate wrongdoing. They are formal requests for information and do not necessarily mean charges are forthcoming or likely.
A spokeswoman for Manhattan district attorney's office declined to comment on the Journal report to Reuters. A Goldman spokesman declined to comment to the Journal. The bank could not immediately be reached for comment by Reuters outside regular U.S. business hours.
(Reporting by Sakthi Prasad in Bangalore; Editing by Matt Driskill)
Friday, September 2, 2011
Fed orders Goldman to review foreclosures (Reuters)
NEW YORK (Reuters) – The Federal Reserve ordered Goldman Sachs Group Inc to hire a consultant to review practices of a former mortgage subsidiary on Thursday and said it plans to assess a monetary penalty for wrongful foreclosures.
The Fed's crackdown sent Goldman shares down 3.5 percent on Thursday, even as the bank announced that it had completed the sale of Litton Loan Servicing LP, the mortgage-servicing business at the heart of its foreclosure problems.
Litton's regulatory troubles stem largely from the practice of "robosigning," in which bank employees signed foreclosure documents without reviewing case files as required by law.
Many large banks, including Bank of America Corp, JPMorgan Chase & Co, Wells Fargo & Co and Citigroup Inc, have been targets of probes by state and federal regulators over the same issue, in the clean-up after a world financial crisis triggered in large part by bad mortgages in the United States and bonds backed by those loans.
The Fed cited "a pattern of misconduct and negligence" at Litton in announcing its enforcement action against Goldman.
An outside consultant will have to review all of Litton's foreclosure activity in 2009 and 2010, to identify borrowers who suffered financial losses due to improper practices. Goldman will have to reimburse those customers and is also responsible for any fines that the Fed assesses after the review is complete.
Separately, Goldman also reached a foreclosure-practices pact on Thursday with New York Financial Services Superintendent Benjamin Lawsky, helping clear the way for the bank to sell the business to Ocwen Financial Corp for $264 million.
The bank agreed to forgive 25 percent of principal balances for struggling homeowners who are 60 days past due on mortgage payments, at a cost of $53 million. Goldman will also compensate some Litton home loan borrowers for wrongful foreclosures at an indeterminate cost.
As part of the deal, Goldman, Litton and Ocwen all pledged to stop the robosigning practice, institute new staffing and training requirements for employees handling foreclosures and withdraw pending foreclosure actions that are based on faulty paperwork. They also agreed to compensate borrowers for wrongful foreclosures and strengthen protections for homeowners in relation to late payment fees and insurance costs.
In return, Lawsky agreed to issue a "no objection" letter to the planned Litton-Ocwen transaction.
But the agreement "does not preclude any future investigations of past practices or release any future claims or actions whatsoever," the state agency said in a statement.
Goldman shares closed down $4.06, or 3.5 percent, at $112.16 on the New York Stock Exchange. Ocwen Financial shares closed down 52 cents, or 3.8 percent, at $13.28.
Goldman bought Litton in 2007 for $430 million, hoping to glean more information about the subprime mortgage market to help its trading business. But more recently, it has become a money-losing thorn in Goldman's side.
The bank began considering a sale of Litton late last year, as the mortgage market continued to suffer losses and state and federal regulators began investigating industry-wide foreclosure problems. Goldman wrote down the value of the business by $220 million in the first quarter.
In a quarterly filing on August 9, Goldman said Litton was facing probes by state attorneys general and banking regulators. A group of the nation's largest banks are said to be working toward a settlement that could resolve some of those investigations and cost the industry billions of dollars.
Ocwen is now the 12th largest mortgage-servicer in the United States after having acquired Litton, a relatively small player that ranked 23rd in the industry.
(Additional reporting by Sakthi Prasad in Bangalore; Editing by Robert MacMillan, Steve Orlofsky, Gary Hill)
Goldman to stop controversial mortgage practices (AP)
NEW YORK – Goldman Sachs' mortgage subsidiary agreed Thursday to stop many of its controversial mortgage-related practices in a settlement with a New York state banking regulator.
The New York's Department of Financial Services and Banking Department said the settlement was a condition to Goldman Sachs Group Inc.'s sale of its Litton Loan Servicing subsidiary to a mortgage company Ocwen Financial Corp.
Also on Thursday the country's chief federal banking regulator, the Federal Reserve Board, announced a formal enforcement action against Goldman to address a pattern of misconduct and negligence in how it handled mortgage loans and foreclosures via Litton.
The Fed ordered Goldman to retain an independent consultant to review foreclosure proceedings initiated by Litton that were pending in 2009 and 2010. The Fed said the review is intended to provide remediation to borrowers who suffered financial injury as a result of wrongful foreclosures or other deficiencies identified in a review of the foreclosure process. The Fed said it also plans to announce monetary penalties.
As part of the New York deal, the Goldman subsidiary said it will stop the practice of robo-signing mortgage paperwork. Robo-signing came to light last fall when it was revealed that the largest banks had outsourced mortgage paperwork to processing companies that, in turn, hired unqualified people to sign thousands of mortgage affidavits without reviewing loan documents. The practice is illegal. Many documents were also notarized them in a way that violates state law. The findings led to a temporary halt to most mortgage foreclosures in the fall of 2010.
Benjamin Lawsky, who took over as the Superintendent of the Department of Financial Services in May, was in charge of approving Goldman's $264 million deal in June to sell Litton to Ocwen.
Lawsky used his approval power to address shoddy mortgage practices at Litton. The agreement does not impact other large banks and mortgage companies.
Goldman, Litton and Ocwen also agreed to withdraw pending foreclosures if affidavits were robo-signed or inaccurate. The settlement requires the company to either return property that was wrongfully sold back to the original borrowers or provide compensation.
Under Thursday's settlement, Lawsky received a commitment from Goldman Sachs to help troubled homeowners by writing down $53 million in unpaid principal of home mortgages.
The deal also prevents Litton or Ocwen from adding late fees and other servicer fees that make it more difficult for delinquent borrowers to pay back what they owe.
The agreement doesn't preclude future investigations of past practices or release any future claims.
Friday, August 19, 2011
Allstate sues Goldman Sachs over toxic investments (AP)
Allstate Corp. is suing Goldman Sachs Group Inc. claiming the broker fraudulently sold it more than $123 million in mortgage-backed securities in 2006 and 2007, before the housing market collapse sent the investments' value plunging.
The insurer claims in a lawsuit filed in New York that the documents Goldman provided at the time "contained untrue statements and omitted material facts" about the mortgages underlying the investments.
"Goldman knew these types of securities were, to use Goldman's own words, ... `junk,' `dogs,' `crap' and `lemons,'" according to the complaint.
Allstate's complaint, filed Monday in New York State Supreme Court by subsidiary Allstate Insurance Co., says Goldman's characterizations of the investments were "revealed to the public by the numerous governmental investigations into Goldman's role in the market's collapse."
The lawsuit alleges Goldman violated state laws against fraud and negligent misrepresentation, and it seeks unspecified damages from Goldman and certain affiliates.
Goldman Sachs spokesman Michael DuVally declined to comment.
The lawsuit is the ninth that Allstate has filed since December over mortgages that were bundled together and sold to investors. The first was a complaint against Countrywide Financial Corp. over $700 million in mortgage-backed securities that Allstate purchased beginning in 2005. That complaint also targets Bank of America Corp., which bought the mortgage giant in 2008.
Defendants in more recent lawsuits filed by Allstate include Morgan Stanley and JPMorgan Chase & Co., Bank of America's Merrill Lynch & Co. unit, and units of Citigroup Inc., Credit Suisse Group AG and Deutsche Bank AG.
The bursting of the housing bubble and the resulting shrinking of the value of mortgage-backed investments helped trigger the Great Recession that began in late 2007.
Allstate's complaint against Goldman alleges that the New York-based bank claimed the mortgages backing the securities it sold were low-risk and followed strict underwriting criteria.
"In fact, Goldman knew that lenders had systematically abandoned the stated underwriting guidelines, producing loans without regard to the likelihood of repayment," the complaint says.
Goldman paid $550 million last year to settle similar civil fraud charges brought by the Securities and Exchange Commission. That was the largest penalty against a Wall Street firm in SEC history. Goldman did not admit or deny wrongdoing.
The SEC accused Goldman of steering investors toward complex mortgage investments without acknowledging the securities had been crafted with input from a client that was betting they would fail.
In June, the Manhattan District Attorney's office asked the bank for information on its activities leading up to the financial crisis.
Goldman's role in selling mortgage-backed securities has been closely watched by lawmakers. A Senate report in April found that Goldman marketed four sets of complex mortgage securities to banks and other investors. The report concluded this was part of Goldman's effort to shift risk from its balance sheet to those of investors.
Shares of Goldman Sachs fell $2.26, or 1.9 percent, to close Tuesday at $116.87.
Shares of Allstate, based in Northbrook, Ill., fell 36 cents, or 1.4 percent, to $25.67.
Thursday, August 18, 2011
Allstate sues Goldman over mortgage debt losses (Reuters)
NEW YORK (Reuters) – Allstate Corp (ALL.N) on Monday sued Goldman Sachs Group Inc (GS.N), accusing the Wall Street bank of causing losses by hiding the risks more than $123 million of mortgage securities it bought.
Allstate, the largest publicly traded U.S. home and auto insurer, has filed several similar lawsuits against other lenders, such as Bank of America Corp (BAC.N), Citigroup Inc (C.N) and JPMorgan Chase & Co (JPM.N), to recover losses on well over $2 billion of securities it bought.
"Goldman underwrote securities using loans from subprime lenders known for issuing high risk, poor quality mortgages," Allstate said in its complaint, citing an April report by a U.S. Senate subcommittee examining the 2008 financial crisis.
Then, by betting against the securities, Goldman "positioned itself to cash in even more when the true nature of the 'junk' was revealed," Allstate added.
Allstate filed its complaint with the New York State Supreme Court in Manhattan. Goldman spokesman Michael Duvally declined to comment.
The case is Allstate Insurance Co et al v. Goldman Sachs & Co et al, New York State Supreme Court, New York County, No. 652273/2011.
(Reporting by Jonathan Stempel, editing by Bernard Orr)
Thursday, August 11, 2011
Regulator sues Goldman Sachs over risky mortgages (AP)
LOS ANGELES – The U.S. regulator of credit unions on Tuesday sued Goldman Sachs & Co. for more than $491 million in damages over losses incurred by two failed credit unions that purchased mortgage-backed securities underwritten by the investment bank.
The complaint filed by the National Credit Union Administration in U.S. District Court in Los Angeles is the latest lawsuit brought by the federal regulatory agency against a major bank as it seeks to recover billions in losses related to risky mortgage-backed securities that brought down credit unions in recent years.
Buyers of mortgage-backed securities, mostly banks, pension funds and other big investors, made money from the investments if the underlying debt was paid off. But as U.S. homeowners started falling behind on their mortgages and defaulted in droves in 2007, the securities failed and their buyers lost billions.
In the complaint, which also names as defendants several issuers of mortgage-backed securities, regulators claim that the documents used in offering the securities contained untrue statements or omissions as to how risky the investments were.
As a result, U.S. Central Federal Credit Union in Lenexa, Kan., and Western Corporate Federal Credit Union in San Dimas, Calif., acquired the mortgage-backed securities, believing the risk of loss was minimal, according to the complaint.
However, even though virtually all of the securities had a triple-A rating, they represented a substantial risk of losses, the NCUA claims. And when the investments' market value plummeted, the credit unions — two of the nation's largest — failed.
The NCUA placed the two credit unions into conservatorship in March 2009. In October of 2010, it placed them into involuntary liquidation.
Goldman Sachs declined to comment Tuesday.
The NCUA says it may sue five to 10 other banks in coming weeks. In June, regulators sued JPMorgan Chase & Co. and Royal Bank of Scotland PLC.
Factoring in the latest lawsuit, regulators are seeking to recover nearly $2 billion in damages.
Any recoveries from the lawsuits would reduce the total losses resulting from the failure of Western Corporate, U.S. Central and three other failed corporate credit unions: Southwest Corporate, Members United Corporate and Constitution Corporate, the NCUA said.
Corporate credit unions provide financing and investment services to the much larger population of retail credit unions.
Shares of The Goldman Sachs Group Inc. added 50 cents to $123.30 in aftermarket trading. The shares ended the regular trading session up $5.07, or 4.3 percent, to $122.73.
Friday, June 10, 2011
Goldman sells mortgage unit Litton for a loss (AP)
NEW YORK – At least one of Goldman Sachs' bets on the subprime mortgage business turned out to be a bust.
Goldman Sachs Group Inc. said Monday it had agreed to sell its subprime mortgage servicing business Litton Loan Servicing to Ocwen Financial Corp. for $264 million. That's much lower than the $428 million Goldman paid for the company in 2007. Goldman also assumed $916 million in debt when it bought Litton. On Monday, Goldman wouldn't say if it still held the debt.
Goldman made substantial profits in 2007 in trades against mortgage securities. That year, it also decided it was a good time to buy Litton, which collects payments from subprime mortgage accounts. However, Litton didn't turn out to be lucrative for Goldman and attracted unwanted attention from regulators.
Goldman said it doesn't expect the sale to have an impact on its earnings. The company already took a write-down in the first quarter that was mostly related to Litton.
Goldman Closes the Door on Subprime (BusinessWeek)
When Goldman Sachs (NYSE:GS - News) bought Litton Loan Servicing, a firm that collects mortgage payments from homeowners, in 2007 for an unannounced price, it seemed like a simple way to get an on-the-ground view of the subprime market. The insight would help Goldman Sachs figure out how much to pay for loans, and Litton would work with borrowers to get them back on track. Other sophisticated investors, including billionaire Wilbur L. Ross and private equity firm Centerbridge Capital Partners, bought mortgage servicers with a similar strategy in mind.
It didn't work out as planned. While there were plenty of distressed mortgages and lots of eager buyers, the loan holders had little incentive to mark down prices because that would mean taking a big loss on their books. "The distressed-asset market never got as hot as people were hoping it would," says Dean H. DeMeritte, an executive vice-president at Phoenix Capital, a Denver brokerage for mortgage servicing contracts.
On June 6, Goldman Sachs agreed to sell Litton to another mortgage servicer, Ocwen Financial (NYSE:OCN - News), for $263.7 million. The sale comes two months after Goldman Sachs wrote down the value of the business by about $200 million. "It really makes sense for them to sell it," says David B. Hilder, an analyst at Susquehanna Financial Group. "They bought it at a time when the business was easier, and it looked like there might be some insights to be gained in the mortgage market from having a servicer." Neither Goldman Sachs nor Litton would comment.
Founded in 1988 by Larry B. Litton Sr. in Houston, Litton was one of the first mortgage servicers to specialize in working with troubled loans, sometimes called "scratch and dent" servicing. It developed that skill during the savings and loan crisis, when it was hired by Resolution Trust Corp. to handle mortgages that were orphaned by failed banks.
Larry Litton Jr., who now runs the company, is known in the industry for his Texas drawl, straight talk, and vocal support for working with struggling borrowers before they get too far behind. Bruce A. Gottschall, the founder of Neighborhood Housing Services of Chicago, a nonprofit that worked with Litton a decade ago, says the company "seemed to me a little bit more flexible in terms of modifications early on." Litton Jr. currently is a member of the Federal Reserve's Consumer Advisory Council, where he has been vocal about foreclosure prevention. Ocwen would not comment on whether he will stay with the company after the sale.
Litton's business grew with the subprime market. In 1995 it serviced $1.2 billion in loans, according to Fitch Ratings. By 2007 its portfolio had ballooned to almost $54 billion; it's about $41.2 billion today. As the boom gave way to the bust, Litton was forced to hire more staff to deal with rising defaults. The company became the target of class actions alleging excessive fees and violations of consumer-protection laws as well as investigations by state and federal regulators. It has agreed to settle at least one of the lawsuits while denying liability; others are pending. It says it is cooperating with government investigations. Goldman Sachs will remain liable for fines and penalties that could be imposed by government authorities relating to Litton's foreclosure and servicing practices before the deal closes.
With the Litton sale, Goldman Sachs will no longer deal directly with homeowners. Gottschall says Goldman's unloading the mortgage servicer is part of a bigger trend: "Wall Street is probably trying to distance themselves from the problems they caused."
The bottom line: By selling Litton Loan Servicing, Goldman Sachs is out of the messy business of working with distressed homeowners.
Monday, June 6, 2011
Goldman may seek to counter Senate findings: report (Reuters)
(Reuters) – Goldman Sachs Group Inc could release documents to counter a Senate subcommittee report that said the bank misled clients about mortgage-linked securities, the Wall Street Journal reported, citing people familiar with the matter.
Goldman, facing probes by several government authorities into derivatives trades it executed in 2006 and 2007, could release documents about its mortgage bets to show the analysis by the subcommittee was inaccurate and incomplete, the paper said.
The information could be released soon on Goldman's website, though a decision has not been made yet, the paper added.
Goldman Sachs did not immediately respond to requests seeking comment.
The subcommittee, headed by Democrat Carl Levin, said Goldman offloaded much of its subprime mortgage exposure to unsuspecting clients when the market for such securities was starting to tank.
Last week, Goldman received a subpoena from the Manhattan district attorney, who joined the Justice Department and the Securities and Exchange Commission in examining Goldman's actions.
(Reporting by Renju Jose in Bangalore; Editing by David Holmes)
Monday, April 18, 2011
Senator questions Goldman execs' testimony (AP)
WASHINGTON – The head of a Senate panel investigating the financial crisis is questioning the accuracy of testimony Goldman Sachs executives gave to Congress last year about whether the firm steered investors toward mortgage securities it knew would likely fail.
Goldman Sachs and Co. agreed in July to pay $550 million to settle civil fraud charges over similar accusations.
Sen. Carl Levin, D-Mich., said Wednesday the subcommittee has found new evidence that shows Goldman's misleading of investors went beyond that one case. He raised doubts about the testimony given last year by a half-dozen Goldman executives. Goldman CEO Lloyd Blankfein was among those who testified.
Goldman spokesman Michael DuVally said the testimony given by the executives was "truthful and accurate" and that the subcommittee's report confirms that.
The report released Wednesday notes that Goldman marketed four sets of complex mortgage securities to banks and other investors. But it says the firm failed to tell them that the securities were very risky, secretly bet against the investors' positions and deceived the investors about its own positions to shift risk from its balance sheet to theirs.
At the hearing last year by the Senate panel, Goldman executives were questioned about the deals. Company e-mails showed Goldman employees deriding the securities as "junk" and "crap."
Goldman CEO Lloyd Blankfein said the company didn't bet against its clients, and couldn't survive without their trust. The company lost $1.2 billion in the mortgage meltdown in 2007 and 2008 that touched off the financial crisis and the worst recession since the 1930s, Blankfein testified. He also insisted that Goldman wasn't making an aggressive negative bet — or short — on the mortgage market's slide.
The company's short positions were mostly offset by long holdings of the securities, the executives said at the hearing.
The new subcommittee report cites internal Goldman documents that it says contradict that assertion.
"I believe they misled the Congress," Levin told reporters. Goldman "gained at the expense of their clients and they used abusive practices to do it," he said.
DuVally, the Goldman spokesman, said that while the company disagrees with many of the report's conclusions, "We take seriously the issues explored by the subcommittee. We recently issued the results of a comprehensive examination of our business standards and practices, and committed to making significant changes."
Goldman agreed last summer to pay $550 million to settle civil fraud charges by the Securities and Exchange Commission of misleading buyers of mortgage-related securities. The agreement applied to one of the four deals cited by the Senate subcommittee.
The report culminates a two-year investigation by the panel, which examined millions of documents and interviewed scores of executives, traders and salespeople.
It portrays "a financial snake pit rife with greed, conflicts of interest and wrongdoing," Levin said.
The panel cited four key areas of causes of the financial crisis:
_Risky mortgage lending as exemplified by Washington Mutual, which became the biggest U.S. bank ever to fail in September 2008.
_The failure of regulators to clamp down on lending abuses and risky conduct at banks in the years leading up to the housing bust and financial crisis.
_The AAA ratings given by the big credit rating agencies to high-risk subprime mortgages that later went bad and helped cause the housing bust.
_The role of investment banks like Goldman Sachs and the finance deals they put together, which flooded the markets with risky securities.
The report also urges federal regulators to make several changes, such as a strong ban on conflicts of interest for investment banks and other financial players. It says the financial overhaul law enacted last year in response to the crisis could help prevent future abuses.
"At the heart of the financial crisis were unresolved, and often undisclosed, conflicts of interest," Sen. Tom Coburn of Oklahoma, the panel's top Republican. "Blame for this mess lies everywhere from federal regulators who cast a blind eye, Wall Street bankers who let greed run wild, and members of Congress who failed to provide oversight."
Levin said the panel planned to convey findings to the Justice Department and the Securities and Exchange Commission for possible further investigation.
Report says Goldman duped clients on CDO prices (Reuters)
WASHINGTON (Reuters) – In a frenzy to protect its interests at the start of the credit crisis, Goldman Sachs Group Inc sold mortgage-linked derivatives to clients at inflated prices and misrepresented the nature of the deals, according to documents released by a Senate subcommittee.
Carl Levin, the Michigan Democrat who heads the Senate Permanent Subcommittee on Investigations, told a press briefing on Wednesday that Goldman had "exploited" clients and that top executives had lied to Congress during testimony in 2010.
"They gained at the expense of their clients and they used abusive practices to do it," said Levin, adding there was still time for regulatory agencies to take action against Wall Street.
The company said that while it disagreed with many of the conclusions, it took seriously the issues explored by the subcommittee.
The bipartisan subcommittee issued a report Wednesday on Wall Street's role in the 2007-2009 financial crisis, and used Goldman Sachs as one of its case studies.
As the market for related credit derivatives ground to a halt in 2007, Goldman management became increasingly concerned about the company's exposure.
Top executives held a meeting on May 11, 2007, to develop a "Gameplan" to value those assets. A few days later, Dan Sparks, who headed Goldman's mortgage division, estimated the company might have to take a $382 million write-down on its portfolio.
"I think we should take the write-down, but market at much higher levels," Sparks told Thomas Montag, then the head of sales and trading, in an email message, according to the subcommittee report.
Another executive, Harvey Schwartz, expressed concern about that tactic, saying, "don't think we can trade this with our clients andf then mark them down dramatically the next day."
Nonetheless, Goldman's collateralized debt obligation sales team actively targeted clients who would be most receptive to buying related CDOs, in hopes of getting additional sales commissions, according to the subcommittee.
FURTHER CHARGES?
Levin and his panel's report stopped short of accusing Goldman of illegal behavior, but Levin said regulators at the Securities and Exchange Commission or the Department of Justice could take the probe further.
The SEC filed civil fraud charges against Goldman last year related to a CDO deal known as Abacus, which the subcommittee also examined in its report. Goldman paid $550 million to settle the claims without admitting or denying wrongdoing.
A source familiar with regulatory investigations into Goldman said all the transactions detailed in the committee's report "have already been subject to review by the SEC staff." The source would not comment on whether the SEC's probes are over or whether it plans to pursue additional charges.
A year ago, Levin's subcommittee held a public hearing into Goldman's practices at which top executives were hammered for selling clients securities that Goldman was betting against.
Since then, Goldman has taken steps to address its perceived conflicts of interest and transparency issues. In January, the company unveiled a new reporting process after a months-long review by a Business Standards Committee.
Goldman spokesman Michael DuVally said the changes "will strengthen relationships with clients, improve transparency and disclosure and enhance standards for the review, approval and suitability of complex instruments."
Levin said he plans to refer certain issues from the report to the Justice Department and SEC, though he would not be more specific about the referrals.
Sources familiar with the panel's investigation cautioned against relating the referrals to Goldman specifically. No referrals have been decided on yet, and Senator Tom Coburn, the ranking Republican on the bipartisan committee, would have to agree.
The subcommittee's report said Goldman management provided the sales team with "talking points" to reassure clients who were wary about the deals. The sales team also advocated for pushing the products onto clients abroad who might be less familiar with the deterioration of the U.S. housing market.
COLORFUL LANGUAGE
Goldman executives and traders used colorful and aggressive language in early 2007 as they strove to extract as much profit from clients as possible.
At one point, Goldman tried to engineer a short-squeeze in the collateralized debt obligation market to drive up prices and maximize its own gains, according to emails and other documents released by the subcommittee.
Michael Swenson, who was then head of Goldman's structured products group and is now a managing director, said traders ought to "cause maximum pain" and "start killing" short investors, with the hopes of leaving "people totally demoralized."
Though the plan ultimately failed, Deeb Salem, a trader involved in the short-squeeze maneuvering, called the idea "brilliant" in a self-evaluation.
There were also interesting tidbits from a Morgan Stanley employee who became increasingly frustrated by Goldman's behavior related to the a CDO deal known as Hudson.
As mortgages went bad and ratings agencies downgraded related bonds, Morgan Stanley advocated for a rapid liquidation of the Hudson CDO. That process took more than a year to perform.
"I broke my phone," a Morgan Stanley trader told a colleague in an email message, after a frustrating conversation with his Goldman counterpart.
Morgan Stanley ultimately lost more than $930 million on the Hudson deal, while Goldman ultimately earned almost $1.7 billion by shorting related securities.
(Reporting by Lauren Tara LaCapra; Editing by Tim Dobbyn)
Tuesday, April 12, 2011
Goldman bets on China insurance with $900 mln Taikang stake buy (Reuters)
HONG KONG (Reuters) – Goldman Sachs (GS.N) has bought a 12 percent stake worth more than $900 million in China's Taikang Life Insurance Co Ltd, giving the Wall Street giant a foothold into the world's biggest insurance market.
Goldman's long-overdue purchase could pave the way for Taikang's planned initial public offering next year, bankers and analysts said, as the insurer seeks more capital to fund its rapid growth in China.
Credit Suisse estimates China's life insurance market --which generated $124 billion premium income in 2009 -- will grow more than 20 percent per annum for the next decade.
But some analysts doubt if Goldman can earn the same big returns that Carlyle Group (CYL.UL) and TPG Capital (TPG.UL) reaped from their investments in Chinese insurance companies.
"Goldman has come in pretty late into the game relative to Taikang's planned IPO timeline, so the returns might not be as high as previous investors have got," said Sally Yim, senior analyst of financial institutions group at Moody's.
Carlyle's investment in China Pacific Insurance (Group) Co (2601.HK) is already on course for its best ever exit, after it sold down a $2.6 billion stake over the past few months.
Last year, TPG sold a $2.4 billion stake in China's Ping An Insurance Group Co (2318.HK), which analysts estimate delivered strong profits for the buyout fund.
RIVAL BIDDERS
Goldman is not new to the China insurance industry, having previously bought a stake in Ping An along with Morgan Stanley (MS.N) in 1994. But Goldman is using its balance sheet to buy the Taikang stake, while the previous investment was made through its private equity arm.
Goldman acquired the Taikang stake from French insurer AXA SA (AXAF.PA), which last month said it agreed to sell its 15.6 percent in Taikang to a group of investors for $1.2 billion.
Goldman beat several bidders, including Kohlberg Kravis Roberts & Co (KKR.N), Blackstone Group (BX.N) and Singapore's Temasek Holdings (TEM.UL), to win the Taikang auction.
China Guardian Auctions Co. and New Deal TEDA Investment Co., Ltd were the others who bought the shares sold by AXA, the China Insurance Regulatory Commission (CIRC) said on its web site. AXA put its stake on the block nearly two years ago and Goldman was picked as the preferred bidder last year.
The stake purchase was approved by CIRC, Goldman and Taikang said in a joint statement.
Taikang and New China Life Insurance Co. are among insurers which are looking to tap the public market over the course of the next year or so. Taikang has about $44 billion in assets and 54 million clients across China.
"The regulators are a bit reluctant to allow insurance companies to raise subordinate debt to replenish capital. So all these companies are looking to shareholders to help inject capital to support growth," Yim of Moody's added.
(Editing by Michael Flaherty and Muralikumar Anantharaman)
Monday, March 21, 2011
How Goldman Treated Warren Buffett (The Motley Fool)
"Every day that Goldman does not call our preferred is money in the bank," Warren Buffett said last year. "Our preferred is paying $15 per second ... so as we sit here... tick tick tick ... its $15 in the bank. I don't want those ticks to go away."
Sadly, they're going away. As has been expected, Goldman Sachs (NYSE: GS - News) called Berkshire Hathaway's (NYSE: BRK-A - News; NYSE: BRK-B - News) preferred stock investments on Friday.
This story begins in September 2008, when the entire financial system, including Goldman, neared collapse. Buffett swarmed in, buying $5 billion worth of preferred stock in Goldman (and $3 billion in General Electric (NYSE: GE - News) a few days later) on enviable terms: The preferred stock yielded 10% and could be called (canceled) by Goldman only at a 10% premium to par. Buffett also received warrants to buy 44 million Goldman shares at $115 a share. After being given the green light by the Federal Reserve on Friday, Goldman is now repaying Berkshire's preferred stock, canceling what has been expensive capital.
How'd Berkshire fare in this venture?
It's easy to get caught up in the big numbers ($15 per second!), but keep things in perspective. Berkshire has earned roughly $3.7 billion profit on a $5 billion investment over 2.5 years, which equals a return of about 25% per year.
This is a spectacular return, of course. But it, too, needs perspective. Goldman announced Berkshire's investment on Sep. 23, 2008. The Dow, closing at 10,854 that day, has since returned roughly 6% per year including dividends. Yet just a month later, on Oct. 23, the Dow was trading at 8,200. Anyone who invested in a simple index fund that day has earned about 19% per year since -- still less than Berkshire's Goldman investment, but not remarkably so. Move out to March 2009, and the Dow was around 6,600. Those who bought an index fund back then have since earned 37% per year -- better than Berkshire's Goldman investment, even adjusted for the shorter time frame.
Or here's a non-hypothetical example. Buffett sold shares of ConocoPhillips (NYSE: COP - News) in the fourth quarter of 2008 to, as he himself notes, fund Berkshire's investments in Goldman and GE. There were likely some tax considerations in this move, but Conoco shares have since returned roughly 25% annually -- the same return earned from the Goldman investment they helped fund.
This is shameless cherry-picking with the benefit of hindsight. Guilty as charged. But it highlights an important point: There's an opportunity cost to every investment. Judged against alternative investments that could have been made during similar time frames, Berkshire's investment in Goldman looks good, but not great. And those alternatives (a diverse group of blue chip stocks) could arguably be looked at as significantly safer than a single investment in an overleveraged investment bank, even if the latter came in the form of preferred stock.
Then there's the issue Buffett biographer Alice Schroeder brought up a year ago: Financial gain aside, was Buffett's alliance with Goldman -- now a company most view as a symbol of moral hazard, regulatory abuse, and downright fraud -- worth it? "Buffett swapped his reputation at a cheap price," Schroeder writes. "It is painful to watch Buffett behaving like a hostage to Wall Street, damaging himself by defending investment banks and saying flattering things about Goldman in a way that contradicts any principled view of the securities business."
Buffett's partner Charlie Munger has shown shades of this contradiction. Last year, Munger was exceptionally critical of Lehman Brothers' behavior, saying "the whole place was pathological about its extremeness." Yet on the same day he defended Goldman by saying:
Goldman was in a world where Congress legalized all types of derivatives. It's an inherently dangerous world. Given that world, I see no reason to think Goldman misbehaved in some horrible fashion. Everyone was doing it, and it's only natural to increase your moneymaking activities when you can do so legally.
Yes, Lehman went bankrupt, and Goldman did not (although a little bailout influenced that outcome). Yet it's difficult to reconcile Munger's two views from a moral standpoint other than acknowledging that Goldman pays Berkshire $15 per second, and Lehman does not.
I don't mean this to be overly critical. In the end, Berkshire's Goldman investment worked as planned. That plan, though, may not have been as lucrative as some assume. As Schroeder notes: "The money wasn't enough. Goldman outsmarted Buffett in this deal."
Think otherwise? Sound off below.
Fool contributor Motley Fool Inside Value selection. Berkshire Hathaway is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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