Under-Fire Goldman Sachs Reveals 90% Jump in Profits

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The Guardian/UK

Under-Fire Goldman Sachs Reveals 90% Jump in Profits

Wall Street bank raises spectre of multimillion dollar bonuses at height of battle over regulatory reform and in spite of accusations of dishonesty

by
Andrew Clark

The under-fire Wall Street bank Goldman Sachs
faced a fresh barrage of public and political outcry today as it
revealed a 90% leap in profits in spite of accusations of dishonesty in
its dealing with clients, raising the spectre of multimillion dollar
bonuses at the height of a battle in Washington over regulatory reform.

Just days after US regulators began a $1bn (£650m) fraud action against the firm, Goldman revealed a leap in quarterly profits from $1.8bn to $3.5bn
and disclosed that it was setting aside $5.49bn to pay its employees. A
top lawyer at the bank rebutted the Securities and Exchange
Commission's prosecution, insisting Goldman had not misled its clients
and describing the case as a "he says, she says" dispute.

Goldman's
figures were given short shrift by the White House, which is preparing
for a fresh push on Wall Street on Thursday when Barack Obama will
visit New York to deliver a speech pressing the case for a crackdown on
the financial industry.

A senior economic adviser to the White
House, Austan Goolsbee, suggested banks such as Goldman should admit
that their soaring profits had been aided by the US government
"stepping up and preventing them all from falling off a cliff".

Goolsbee
said: "Before they all pat themselves on the back for the great job
they did and get a big bonus based on their profits, somebody ought to
recognise that a great deal of their profit came from financial
interventions from the government to save their bacon."

In Britain, the Financial Services Authority escalated its scrutiny of Goldman to a formal investigation, joining the SEC's probe into a mortgage-related security overseen in 2007 by a London-based Goldman banker, Patrice Tourre, which was allegedly packed deliberately with toxic homeloans, yielding a huge profit for a hedge fund that bet on its failure.

On
the election trail, the chancellor, Alistair Darling, weighed in,
remarking that the accusations "almost beggar belief". But Darling
rejected calls from the Conservatives for an immediate block on any
government work with Goldman, saying: "I don't think you can stop doing
business with a firm because an individual is accused of doing
something."

At the core of the case against Goldman is an
allegation that a hedge fund, Paulson & Co, played a key role in
selecting the mortgages packed into a collateralised debt obligation
named Abacus, which was then sold to clients by the bank. Because
Paulson intended to take a "short" position, it had a vested interest
in choosing mortgages likely to default. Within nine months, 99% of the
homeloans in the package had indeed been downgraded, leaving Royal Bank
of Scotland, which insured the deal against failure, with an $840m bill.

Goldman's
co-general counsel, Gregory Palm, insisted that Paulson did not choose
the mortgages in the package but merely made "suggestions" to financial
consulting firm ACA Management, which became a big investor in Abacus.

"Paulson
did not select the portfolio, ACA did," said Palm, who repeatedly
denied any wrongdoing. "If we had evidence that someone was trying to
mislead someone, that's not something we'd condone at all. We'd take
action."

Quizzed by media on a conference call, Palm
characterised the lawsuit as a "factual dispute" revolving around
different individuals' recollection of events: "When you go to the core
of the SEC case and look at it, it revolves a little around 'he says,
she says'."

The prosecution of Goldman is quickly becoming a
contentious political issue in the US. The SEC has taken action just as
the Obama administration tries to force a tightening of Wall Street
regulation through Congress in spite of Republican objections.

In
a sign of a partisan split, it emerged today that the five-member
governing board of the SEC voted 3-2 in favour of action against
Goldman, with two Democrats favouring prosecution but the SEC's two
Bush-appointed Republican commissioners voting against. The SEC's
chairman, Mary Schapiro, a political independent, provided the casting
vote.

Keen to mount the most aggressive possible defence, Goldman
has hired a heavy hitting former White House counsel, Gregory Craig, to
provide legal advice. Craig worked for the Obama administration until
November, and during the 1990s he served as special counsel defending
Bill Clinton against impeachment.

Goldman's profits were not
sufficient to stem a steady decline in its share price, which dropped
1% in early trading on Wall Street. Jacob Frenkel, a former SEC lawyer
now in private practice, said most cases of the type facing Goldman
were quietly settled but that the regulator seemed determined to
deliver a powerful enforcement message at a politically sensitive time,
leaving Goldman with no choice but to fight: "At this point, there's no
downside for Goldman in jumping in the ring and going at it for a few
rounds."

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