Archive for April, 2010

Asian stock markets fall after muted US session (AP)

Monday, April 26th, 2010 | Finance News

TOKYO – Most Asian stock markets declined Tuesday after a directionless day on Wall Street as investors awaited earnings from some of the region's biggest companies.

Japan's Nikkei 225 stock average fell 0.4 percent to 11,119.5 as investors took profits after a big jump Monday. Sentiment was also cautious ahead of earnings reports from big Japanese companies over the next few weeks.

Due out Tuesday are financial results from Sharp Corp., mobile carrier Softbank Corp. and automaker Mitsubishi Motors Corp.

Hong Kong's Hang Seng index lost 1.2 percent to 21,302.31. South Korea's Kospi slipped 0.2 percent to 1,748.54 despite data showing that the country's economic growth accelerated sharply in the first quarter of 2010. Gross domestic product expanded 1.8 percent in the January-March period from the fourth quarter last year.

Benchmarks in mainland China, Taiwan and Singapore also declined.

Australian shares bucked the trend, with the S&P/ASX 200 edging up less than 0.1 percent to 4,883.30 on gains in mining shares. Rio Tinto Ltd. rose 0.2 percent, and rival BHP Billiton Ltd. added 0.3 percent.

In New York on Monday, shares eked out a tiny gain after strong earnings reports overshadowed questions about financial regulation. The Dow Jones industrial average rose 0.75 point, or less than 0.1 percent, to 11,205.03.

Investors also got some reassurance about Greece's debt problems. The Greek government on Friday said it wanted to tap a rescue package from 15 European countries and the International Monetary Fund.

Oil prices fell in Asia with benchmark crude for June delivery down 58 cents at $83.62 a barrel in electronic trading on the New York Mercantile Exchange.

In currencies, the dollar slipped to 93.82 yen from 93.98 yen late Monday. The euro was trading at $1.3375 from $1.3394.


Senate probe: Goldman planned to profit from bust (AP)

Monday, April 26th, 2010 | Finance News

WASHINGTON – Goldman Sachs developed a strategy to profit from the housing meltdown and reaped billions at the expense of clients, a Senate investigation has found.

Top Goldman executives misled investors in complex mortgage securities that became toxic, investigators for a Senate panel allege. They point to e-mails and other Goldman documents obtained in an 18-month investigation. Excerpts from the documents were released Monday, a day before a hearing that will bring CEO Lloyd Blankfein and other top Goldman executives before Congress.

Blankfein says in his own prepared remarks that Goldman didn't bet against its clients and can't survive without their trust.

The Securities and Exchange Commission this month filed a civil fraud case against the bank, saying it misled investors about securities tied to home loans. The SEC says Goldman concocted mortgage investments without telling buyers they had been put together with help from a hedge fund client, Paulson & Co., that was betting on the investments to fail.

Goldman disputes the charges and says it will contest them in court.

At the hearing, Blankfein will repeat the company's argument that it lost $1.2 billion in the residential mortgage meltdown in 2007 and 2008 that touched off the financial crisis and a severe recession.

He also will argue that Goldman wasn't making an aggressive negative bet — or short — on the mortgage market's meltdown.

"We didn't have a massive short against the housing market, and we certainly did not bet against our clients," Blankfein says in the prepared remarks released by Goldman. "Rather, we believe that we managed our risk as our shareholders and our regulators would expect."

But Sen. Carl Levin, D-Mich., chairman of the Senate Permanent Subcommittee on Investigations, said Monday: "I think they're misleading the country. ... There's no doubt they made huge money betting against the (mortgage) market."

Goldman "knew of Paulson's involvement in the selection" of securities, Levin told reporters. "They knew Paulson was going short."

"Need to decide if we want to do 1-3 (billion) of these trades for our book or engage customers," a December 2006 e-mail exchange between two Goldman executives says.

On one group of securities, "I'd say we definitely keep for ourselves. On (another), I'm open to sharing to the extent that it keeps these customers engaged with us."

The subcommittee provided excerpts of e-mails showing a progression from late 2006 through the full-blown mortgage crisis a year later. Levin said they show Goldman shifted in early 2007 from neutral to a short position, betting that the mortgage market was likely to collapse.

"That directional change is mighty clear," Levin said. "They decided to go gangbusters selling those securities" while knowing they were toxic.

The issue of how much Goldman executives pushed such policies and were aware of the mortgage trading department's practices is a key one emerging before the Senate hearing.

Some experts say damage to Goldman's reputation has already been done and might be long-lasting.

Regardless of the outcome of the SEC's case, "Goldman Sachs has lost," said James Cox, a Duke University law professor and securities law expert. "It's lost in the arena of public opinion."

The 140-year-old investment house's trading strategy in recent years enabled it to weather the financial crisis better than most other big banks. It earned a blowout $3.3 billion in the first quarter.

Even before the SEC filed its fraud charges on April 16, Goldman denied that it bet against clients by selling them mortgage-backed securities while reducing its own exposure to them by taking short positions.

By the Senate subcommittee's reckoning, Goldman made about $3.7 billion from its short positions in several complex mortgage securities called collateralized debt obligations in 2006-2007. The short positions made up about 56 percent of its total risk during the period, the investigators found.

But the company says it lost $1.2 billion when it sold home mortgage securities in 2007 and 2008.

The firm's correspondence to the SEC dated Oct. 4, 2007 includes this: "During most of 2007, we maintained a net short subprime (mortgage) position and therefore stood to benefit from declining prices in the mortgage market."

In his prepared remarks, Blankfein acknowledges, "We have to do a better job of striking the balance between what an informed client believes is important to his or her investing goals and what the public believes is overly complex and risky."

He adds, "If our clients believe that we don't deserve their trust, we cannot survive."


Goldman wages PR fight to clear its name (AP)

Monday, April 26th, 2010 | Finance News

NEW YORK – Goldman Sachs Group Inc. is fighting to clear its name, but not in a court of law.

Goldman has hit back hard against civil fraud charges with a public relations blitz aimed at poking holes in the Securities and Exchange Commission's case and repairing the bank's reputation. Every time the SEC has punched, Goldman has quickly counterpunched.

Public relations consultants say it's too early to know if the strategy is working for Wall Street's most powerful bank. Some big Goldman clients are publicly backing the firm, yet its stock has yet to recover from the double-digit nosedive that followed the SEC lawsuit on April 16.

To help its cause, Goldman has hired Mark Fabiani, a big player in the PR world with strong ties to top Democrats. Fabiani earned the nickname "Master of Disaster" for his handling of crises during the Clinton administration. He now works as a media consultant specializing in corporate crisis management. Goldman has also brought in top corporate attorneys. And its executives, including CEO Lloyd Blankfein, have been out in public, not hunkering down.

The damage control efforts will be on display Tuesday when Blankfein and Fabrice Tourre, the employee named in the SEC fraud charges, are questioned by a Senate subcommittee probing the bank's role in the financial crisis.

Goldman's PR campaign, which runs counter to its long history of secrecy, is a bold yet risky move. Some analysts say a poor performance on Capitol Hill could worsen the bank's image problems and make it harder for it to attract and retain lucrative clients. If the strategy fails, analysts say, it could cost Blankfein and other Goldman executives their jobs.

But the company got a boost last week when several big clients including the investment firm Blackstone Group and Ford Motor Co. said they're sticking by the bank. More support came from Warren Buffett, whose company, Berkshire Hathaway, has a big Goldman stake. Berkshire Hathaway has said Buffett isn't concerned about his investment in the bank.

Blankfein and Tourre were both at Goldman's headquarters in New York over the weekend preparing for Tuesday's hearing, according to a person with knowledge of the matter. Tourre on Saturday also met with investigators for the Senate panel during an hours-long interview, according to the person, who requested anonymity because the talks were confidential.

In prepared testimony released by Goldman Monday, Blankfein repeated Goldman's intention that it had done nothing wrong when it sold risky securities to two investors who lost hundreds of millions of dollars.

But the CEO acknowledged, "We have to do a better job of striking the balance between what an informed client believes is important to his or her investing goals and what the public believes is overly complex and risky."

A careful strategy is critical to Goldman given the forces lining up against the bank. They include the SEC and congressional Democrats who are using the case to push for a regulatory overhaul of the financial services industry. Investors, meanwhile, have started filing suit against Goldman because of the 13 percent drop in the company's stock after the SEC lawsuit was announced.

But Goldman has its own army.

"Goldman is a very wealthy firm, and they're bringing tens of millions of dollars in resources to this fight," said Thomas Ajamie, a Houston-based defense lawyer who specializes in financial fraud cases but who isn't working for Goldman. "They have hired very skilled lawyers, lobbyists and public relations people. They appear to be getting their story out."

Top financial law firm Sullivan & Cromwell LLP is heading Goldman's defense. The lead lawyer is Richard Klapper, who represented Barclays Capital when Enron shareholders sued the investment firm in 2007. Goldman has also hired Gibson, Dunn & Crutcher, the law firm of former U.S. Solicitor General Theodore Olson, and K. Lee Blalack, a partner in Washington-based law firm O'Melveny. Rounding out the team is Greg Craig, the former chief counsel under President Barack Obama.

None of the law firms responded to requests for comment.

Fabiani told The Associated Press he was hired in early April, before the SEC sued Goldman, to help the firm prepare for congressional hearings and related issues. He declined to comment further.

The SEC alleges the bank misled two investors who bought a complex mortgage-related product that was crafted in part by Paulson & Co., a New York hedge fund led by billionaire John Paulson. The hedge fund manager was betting the product would fail. The SEC says Goldman didn't fully disclose Paulson's role in creating the deal or his negative bet to two investors, IKB Deutsche Industriebank AG, a German bank, and ACA Management LLC, a U.S. bond insurance company.

Working in Goldman's favor is federal law's vagueness about how much disclosure investment banks need to make on private transactions between financial institutions.

"This is not selling a product to a widow who lives in Wichita. For that victim, there's a very different standard of law," said Ajamie, who won a record $429 million securities fraud arbitration case in 2001 on behalf of a group of clients of the Paine Webber investment bank. Paine Webber was acquired by the Swiss bank UBS in 2000.

Blankfein's testimony Tuesday will be before the Senate Permanent Subcommittee on Investigations. Tourre, the 31-year-old at the center of the SEC charges, is among other Goldman employees scheduled to testify.

It's a gutsy appearance in which the executives' demeanor will likely be as important as their words, said Tim Metz, crisis management specialist at New York communications firm Hullin Metz & Co.

"They're going to have eat some humble pie. Otherwise the senators will beat up on them," Metz said.

The bank got a taste of what's to come when the Senate subcommittee's chairman, Carl Levin, D-Michigan, released e-mails Saturday showing that top Goldman executives boasted about the money the firm was making as the national housing market collapsed in 2007.

Later that day, Goldman said Levin's office "cherry-picked" a few e-mails among 20 million documents the bank provided. It also released several more e-mails, including one in which Tourre describes risky investments he sold as being "like Frankenstein turning against his own inventor."

Goldman called Tourre's e-mails embarrassing but said it has found no evidence that he acted unlawfully.

Still, allowing Tourre to testify before Congress is a gamble, said Nomi Prins, a former Goldman employee who wrote a book about the financial crisis.

"To the extent that he could say something wrong, I find it uncharacteristically irresponsible of them," said Prins, author of "It Takes a Pillage: Behind the Bonuses, Bailouts, and Backroom Deals from Washington to Wall Street."

The risk for the Goldman is that negative publicity might become so intense "that clients will no longer be willing to admit they do business with so tainted a company," Rochdale Research analyst Richard Bove said in a note. He said Blankfein's job could be at risk.

Yet Goldman's big U.S. clients don't seem to be worrying.

"We're a major client of Goldman's and will continue to be a major client of Goldman's," Stephen Schwarzman, CEO of private equity giant Blackstone Group, said last week. "We've never had any circumstance where there's been a question about their ethical character."

Ford, a Goldman client going back decades, also said it's standing by the bank.

"We've had a long relationship with Goldman Sachs, and we expect it to continue," spokesman Mark Truby said.

Even if Goldman's business doesn't suffer, some say the damage to its public image may already be done.

Goldman "has become an iconic image of bankers with conflicts of interest," said John Coffee, securities law professor at Columbia Law School. "That image is out there in the public's mind and will be out there in 10 years."