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Goldman's $550 million SEC settlement: Who gets the money?

Of the $550 million that Goldman Sachs Group on Thursday agreed to pay to settle the government’s securities fraud suit against the company, $300 million will go to the Treasury as a penalty.

Your share as one of 310 million Americans: about 97 cents.

GoldmanHQ The other $250 million will reimburse two sophisticated investors that were among Europe’s biggest casualties of the global financial-system crash. They were the ones Goldman allegedly duped -- although the Wall Street titan had insisted to the SEC that the investors knew exactly what they were getting into, or should have known.

The German bank IKB in 2007 bought $150 million of the subprime-mortgage-related securities that Goldman concocted and sold. The SEC alleges that Goldman failed to disclose in its marketing materials that the securities were chosen in part by a hedge fund that was betting on their failure.

IKB lost its entire $150 million as the securities crumbled in value with the housing bust. It will get all of that back from Goldman.

Interestingly enough, IKB had its own struggle with accurate disclosure: The bank’s former CEO on Wednesday was convicted in Germany of misleading IKB’s investors about the extent of the bank’s investments in U.S. subprime loans in 2007.

IKB required a series of German government bailouts in 2007 and 2008. It was sold later in 2008 to Lone Star Funds, a Dallas-based private equity firm.

Goldman also will pay $100 million to Royal Bank of Scotland, which bought the Dutch bank ABN AMRO in late 2007. Via credit default swaps, ABN AMRO in 2007 had agreed to insure the highest-quality portions of the Goldman securities.

It was a bad move: The collapse of the securities left ABN AMRO on the hook for $841 million. That’s what  Royal Bank of Scotland paid to Goldman in August 2008 to unwind the insurance deal. Most of that sum was subsequently paid by Goldman to Paulson & Co., the hedge fund that had helped design the deal.

Royal Bank of Scotland had to be rescued by the British government in late 2008 as the bank’s credit losses deepened.

Goldman shouldn't have much trouble writing those reimbursement checks: The $550 million amounts to just 16% of the $3.46 billion the firm earned in the first quarter alone, and 4% of its $13.4-billion in full-year 2009 profit.

-- Tom Petruno

Photo: Goldman's New York headquarters. Credit: Brendan McDermid / Reuters

Goldman agrees to settle fraud case with SEC, will pay $550 million

The Securities and Exchange Commission said Thursday it reached a settlement with Goldman Sachs Group in the landmark fraud case the agency brought against the banking titan over the sale of mortgage-related securities.

Under terms of the deal, Goldman will pay $550 million, which the SEC says is the largest-ever penalty paid by a Wall Street firm. The total amounts to about 4% of Goldman's net profit last year.

As usual in these settlements, Goldman won't admit or deny guilt. But the firm will acknowledge that its marketing materials for the securities it sold contained "incomplete information," the SEC said.

The agency is planning a news conference at 1:45 p.m. PDT.

Goldman shares jumped $6.16 to $145.22 in the final half hour of trading as the rumor of a settlement spread. The broader market also got a lift, with the Dow industrials closing off fractionally after being down about 95 points.

The SEC sued Goldman in April, alleging that the Wall Street titan duped investors in toxic mortgage securities by failing to give them the entire story about a deal the bank was selling -- and who really stood to benefit. The investors ultimately lost more than $1 billion on the securities Goldman sold as the mortgage market crashed, the SEC said.

The SEC alleged that Paulson & Co., one of the world's biggest hedge funds, paid Goldman $15 million in April 2007 to structure a so-called collateralized debt obligation, or CDO, that Paulson could then bet against via the use of credit default swaps.

The agency said that Goldman had "failed to disclose to investors vital information about the CDO  . . . particularly the role that hedge fund Paulson & Co. played in the portfolio selection process and the fact that Paulson had taken a short position against the CDO."

Paulson, led by former Bear Stearns banker John Paulson (no relation to former Goldman CEO and ex- Treasury Secretary Henry M. Paulson), was one of the biggest beneficiaries of the housing meltdown because the firm saw early on that the market was headed for collapse, and figured out ways to profit from that catastrophe.

“This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing,” said Robert Khuzami, head of the SEC’s enforcement division.

Rumors of a Goldman deal with the SEC had grown louder in recent days.

Of the $550 million the firm will pay, $250 million will go to harmed investors and $300 million will go to the Treasury. The settlement must be approved by a federal judge.

For Goldman, the penalty is a fraction of its annual earnings. The firm posted a profit of $13.4 billion in 2009.

The SEC said the settlement did not cover Fabrice Tourre, the 31-year-old Goldman banker who assembled the securities sale and the only individual who was charged in the case. The suit against Tourre continues, the agency said.

-- Tom Petruno

Another hit to Goldman's image; 'politically tone deaf'?

It’s hard to imagine that Goldman Sachs & Co. would want to give the government another opportunity to paint the firm as an enemy of the state. Yet that’s exactly what the bank did by stonewalling the federal panel investigating the financial crisis.

The Financial Crisis Inquiry Commission on Monday said it had subpoenaed Goldman after the firm continued to stiff the commission on specific documents and interviews it had requested.

In a media conference call early Monday, FCIC Chairman Phil Angelides and Vice Chairman Bill Thomas excoriated Goldman for its lack of cooperation in recent months, which they said contrasted with the responses from other big Wall Street banks.

For its part, Goldman appeared not to understand how it could have offended the commission. “We have been and continue to be committed to providing the FCIC with the information they have requested,” a spokesman said via e-mail.

Fcicpanel But Angelides said Goldman’s conduct had been “deliberate and disruptive” -- which sounds a lot like a teacher describing a particularly bad student to the kid’s parents.

Some Wall Street veterans were stunned that Goldman would take the chance of aggravating the bipartisan FCIC, which, after all, is doing what Congress told it to do.

“I am hard pressed to name any management team that is more politically tone deaf than the group that was once thought of as a brain trust,” said Barry Ritholtz, head of investment research firm Fusion IQ and author of the book “Bailout Nation.”

Later Monday the FCIC released more details about what it specifically wanted from Goldman, and said it would now seek via subpoena. Two areas of focus, not surprisingly: Goldman’s “ABACUS” mortgage-bond transactions, which are at the heart of the Securities and Exchange Commission’s civil fraud suit against the firm; and pre-crisis transactions between Goldman and bailed-out insurance titan American International Group.

Read the three-page FCIC document here.

The FCIC included a chronology of recent communications between commission staff and Goldman. Here’s part of the timeline:

Continue reading »

Financial crisis commission subpoenas Goldman Sachs, accuses bank of stonewalling on information

The federal commission investigating the financial crisis on Monday attacked Goldman Sachs & Co. for failing to cooperate with information requests, and said it was forced to issue a subpoena to get what it wants.

In a conference call with the media, Financial Crisis Inquiry Commission Chairman Phil Angelides and Vice Chairman Bill Thomas accused Goldman of dumping a massive amount of documents on commission staff instead of answering specific information requests.

Angelides and Thomas said that at least half a dozen other major U.S. banks have supplied the commission with detailed responses to its questions. “They are the outlier,” Angelides said of Goldman.

Thomas said Goldman sent the FCIC the equivalent of 2.5 billion pages of information without providing indexes to assist the commission in combing through the documents.

FCIClogo The FCIC, Thomas said, shouldn’t have to search for the proverbial needle in the haystack. “We expect them to provide us with the needle,” he said.

A person familiar with the situation said Goldman had been stonewalling the commission on its requests, then suddenly flooded investigators with documents in the last two weeks.

Congress created the bipartisan commission last year to conduct a broad probe into the credit-market debacle and the resulting crash in financial markets. The commission’s final report is due in December.

Angelides said Goldman’s strategy appeared to be “a very deliberate effort to run out the clock” as the commission nears its deadline.

Thomas, sounding exasperated and aggravated, added: “What have they got to hide?”

Asked about the subpoena, a Goldman spokesman said: “We have been and continue to be committed to providing the FCIC with the information they have requested.”

In a potential landmark case, the Securities and Exchange Commission in April charged Goldman with civil fraud in its marketing of complex mortgage-related securities in 2007. The bank has denied wrongdoing.

The FCIC has interviewed more than 800 people as part of its probe. The vast majority of the individuals and firms contacted have provided information without being compelled by subpoena. But the commission had to resort to subpoenas to get testimony last week from Moody’s Corp. and billionaire Warren Buffett for a hearing on the role of credit-rating firms in the mortgage meltdown.

Goldman shares were down $2.17 to $140.08 at about 11:30 a.m. PDT.

-- Tom Petruno

Wall Street Roundup: JP Morgan's big fine. Upheaval on trading desks

Jobless claims down. The number of people filing for unemployment claims dropped from last week, and a bit more than analysts expected, the Labor Department reported.

JP Morgan's big fine. Britain's financial regulator slapped its biggest fine ever on JP Morgan for failing to segregate client and firm money -- $48.9 million was the tab. 

Upheaval on trading desks. While the Financial Times reports that Congress is moving forward with strict rules on proprietary trading at banks, the Wall Street Journal reports that successful traders are leaving banks to go off and start hedge funds where they will be untouched by government regulations.

Buffett takedown. After Warren Buffett testified Wednesday on the credit rating agencies, Fox Business Network's Charlie Gasparino slammed Buffett for defending the agencies. 

-- Nathaniel Popper in New York

On deck: An all-day SEC roundtable on market volatility, high frequency trading and 'dark pools'

When the Securities and Exchange Commission in January announced a broad review of the structure of U.S. stock markets, it wondered aloud whether the rules governing markets “have kept pace with, among other things, changes in trading technology and practices.”

The “flash crash” of May 6 showed that the SEC was at least on the right track -- even if the agency, as usual, could be accused of being behind the curve in terms of taking needed action.

On Wednesday the SEC will hold an all-day roundtable session on market structure questions, with the intent of delving into issues that have become a lot more interesting to many investors amid the wild market upheaval of the last month.

The session will be webcast live at www.sec.gov beginning at 6:30 a.m. PDT.

SECshielf There will be three separate panels. The first one, “Market Structure Performance and Price Volatility,” will focus on questions including whether the government could take steps to “appropriately minimize short-term volatility and its harm to longer-term investors,” according to the SEC.

The second panel, “High Frequency Trading,” will focus on the high-speed computerized trading that has become a hot topic since the May 6 flash crash.

The final panel, “Undisplayed Liquidity,” will look into issues raised by the volume of stock trading in so-called dark pools, private trading systems where investors can buy or sell without displaying quotations to the public.

Go here for more detailed descriptions of the panels and a list of the scheduled speakers.

Last week, before the SEC released the panel lineups, Sen. Ted Kaufman (D-Del.) criticized the agency based on what he said were preliminary reports about the invited speakers for the high-frequency-trading panel. He said it appeared that the panel would be stacked in favor of trading firms that would be expected to defend the market status quo.

In a follow-up statement on Tuesday, Kaufman said that although the SEC addressed some of his concerns with the panel’s final makeup, he still wasn’t satisfied that the invited speakers represented “balance.”

-- Tom Petruno

'Flash Crash' postmortem: How some buyers got stocks for a penny, without even trying

How was it that some big-name stocks temporarily sold for a mere 1 cent a share in last Thursday’s  market dive?

Securities and Exchange Commission Chairwoman Mary Schapiro, testifying before Congress on Tuesday, took a stab at explaining some of the technical reasons for the trades that occurred at near-zero prices -- while stressing that the agency still didn’t know what triggered the brief collapse in the first place.

Secchair We already know that investors and traders who used “market” sell orders during the late-afternoon plunge were most at risk, because those orders are supposed to be executed at the prevailing best market price (as opposed to “limit” orders that have specific price instructions).

As sell orders poured in late Thursday, while buy orders dried up, the sell orders within the market trading network kept trying to find a buyer -- anywhere and at any price.

But who was smart enough to be offering to buy shares for mere pennies at that point?

Here’s Schapiro, in her testimony:

Finally, the absurd result of valuable stocks being executed for a penny likely was attributable to the use of a practice called “stub quoting.” When a market order is submitted for a stock, if available liquidity has already been taken out, the market order will seek the next available liquidity, regardless of price. When a market maker’s liquidity has been exhausted, or if it is unwilling to provide liquidity, it may at that time submit what is called a stub quote -- for example, an offer to buy a given stock at a penny. A stub quote is essentially a place holder quote because that quote would never -- it is thought -- be reached.

When a market order is seeking liquidity and the only liquidity available is a penny-priced stub quote, the market order, by its terms, will execute against the stub quote. In this respect, automated trading systems will follow their coded logic regardless of outcome, while human involvement likely would have prevented these orders from executing at absurd prices. . . . We are reviewing the practice of displaying stub quotes that are never intended to be executed.

As we know, some of those deep-discount trades were canceled after trading ended Thursday because they were “clearly erroneous.” But the threshold set by the New York Stock Exchange and Nasdaq for cancellation of a trade was a price 60% or more removed from the price shortly before the dive occurred.

That still left some unknown number of investors stuck with the consequences of market sell orders that were executed within the 60% limit.

Continue reading »

Michael Hiltzik: How to kill a securities market

Most people can accept stock market downturns if they're tied somehow to the natural ebb and flow of market sentiment and the underlying economy. Strike that -- almost nobody accepts losing money in the stock market. But at least when the losses result from an economic slowdown, a correction, or some other cyclical phenomenon, they're understandable.

As my Sunday column observes, episodes like the ridiculous market collapse on Thursday are different. When losses are tied to some insane trading strategy gone awry or to the exchanges' inability to keep up with their own electronic systems, that's a development that can sap investor confidence for years.

Back in the 1980s John Phelan, then the president of the New York Stock Exchange, braved the slings and arrows of his own members and pundits from one end of Wall Street to the other to ready the NYSE floor for what he perceived would be a surge in high-speed electronic trading. He probably saved the Big Board from extinction. His successors seem to be on the road to undoing his achievement. 

Let's not be unfair to the NYSE -- it's only one of many exchanges, all competing with one another for the lucrative business of hosting high-speed computerized stock trading. They need to work together, and work with their regulators, to impose consistent rules and sophisticated surveillance systems, or there will be so little confidence in the work they do that they won't have any customers left.

The column starts below.

So much for the biggest, safest, most liquid securities market in the world.

Of course we’re talking about the U.S. equities market, which used to be described in those glowing terms. But now, after Thursday’s trading debacle, the market looks more like a casino — and not just any casino, but one of those smelly joints with sawdust on the floor, ripped felt on the blackjack tables and loaded dice.

I’ve been inside casinos like that. I wouldn’t think of laying a 10-cent bet with the dealer. So why would I buy stock on an exchange emitting the same odor of rancid beer?

The market’s friends, including executives of the various exchanges and some traders with access to  turbocharged equipment, would like us to think that the system worked Thursday. This is based on the idea that things could have been a lot worse.

But let’s not sugarcoat the event. When you have the Dow Jones industrial average falling nearly 1,000 points before recovering, including a nausea-inducing collapse of more than 700 points in a matter of minutes; when you have legitimate stocks like Accenture quoted at a penny a share, or about  zero percent of their real value; and when therefore you have millions of investors trapped by insane prices, by any rational standard of market performance that’s a sin.

Read the whole column.

-Michael Hiltzik

'Clearly erroneous' trades to be canceled after some stocks dive to pennies in market mayhem

How insane a day was it on Wall Street?

The Dow Jones industrial average briefly was down as much as 998 points, or 9.2%, at its session low of 9,870 on Thursday, before rebounding to close at 10,520.32, off nearly 348 points (3.2%) for the day.

But as computerized trading systems ran wild on the sell side -- and buy-side bids suddenly disappeared -- some big-name stocks traded for just pennies at their lowest points of the day.

Shares of utility Exelon Corp., for example, were trading at around $40 shortly before 11:45 a.m. PDT --  then suddenly dived to 41 cents. A few minutes later the stock was back to $40. It closed at $41.86, down $1.83 for the day.

Boston Beer, which brews the Sam Adams brand, fell from $56 to as low as 1 cent, then soared back to $56, before closing at $55.82, off 37 cents.

The rock-bottom trading prices clearly weren’t meant to be. Computers were executing sales in all-electronic markets based on the instructions that were programmed into them, but no human would have wanted those programs to be followed at mere penny prices. In the space of a few minutes, the machines just ran away with things amid a surge in sell orders and a dearth of buy orders.

By late in the day, major electronic markets including Nasdaq and NYSE Arca announced they would cancel stock trades that occurred between 11:40 a.m. PDT and noon PDT if the prices were 60% higher or lower than the last price quoted at 11:40 a.m. NYSE Arca said those trades were "clearly erroneous."

For lists of stocks subject to canceled trades, see the Nasdaq press release and the NYSE Arca release.

-- Tom Petruno

Buffett defends Goldman Sachs at Berkshire annual meeting

Embattled banking giant Goldman Sachs Group got a strong vote of confidence Saturday from Warren Buffett -- but a less-ringing endorsement from Buffett's long-time business partner, Charlie Munger.

Speaking in Omaha at the annual shareholders' meeting of Berkshire Hathaway Inc., Buffett's holding company, the investing legend defended his $5-billion preferred-stock investment in Goldman made in 2008, and said his view of the bank wasn't changed by the Securities and Exchange Commission's fraud suit against the company.

From Reuters:

"We love the investment," Buffett said. "I do not hold against Goldman the fact at all" that the SEC sued. He said it did not fall "within my category" of where reputational issues would call into question the Berkshire investment.

"If it leads to something more serious, then we will look at the situation at that time," he said.

The SEC sued Goldman last month, alleging that the bank duped investors in a subprime-mortgage-related investment it sold in 2007 by failing to give them the entire story about the deal -- and who really stood to benefit.

Buffettw This week news reports said Goldman also is the target of a criminal investigation by the Justice Department.

Asked at the Berkshire meeting whom he would pick to replace Goldman CEO Lloyd Blankfein if the latter were to depart, Buffett said: "If Lloyd had a twin brother, I would vote for him. I have never given that a thought."

Munger, Berkshire's vice chairman, said there were "plenty" of chief executives he would like to see replaced, but that Blankfein wasn't among them. Even so, Munger appeared to hedge his support for Goldman.

From the Wall Street Journal:

Munger, who told The Wall Street Journal this week that Goldman was engaged in "socially undesirable" activities, told shareholders that he would have voted against SEC prosecution.

But Mr. Munger indicated he believes Goldman may have come closer to the edge of suspect behavior than Mr. Buffett does. "I think it was a closer case than you do," he told Mr. Buffett during an exchange.

The 20,000-some Berkshire shareholders packing the Qwest Center arena for the annual Buffett lovefest had a "tepid" reaction to his comments on Goldman, the Journal said: "While a number of comments by the Berkshire chairman in the morning were greeted with strong applause by the crowd . . . his comments on Goldman were largely met with silence."

-- Tom Petruno

Photo: Warren Buffett. Credit: Daniel Acker / Bloomberg News

Goldman shares slump ahead of expected fireworks at Senate hearing Tuesday

Shares of Goldman Sachs Group fell to a 2 1/2-month low Monday ahead of the grilling company executives are expected to face on Capitol Hill on Tuesday.

Goldman stock dropped $5.37, or 3.4%, to $152.03. The percentage loss was the largest since the shares plunged nearly 13% on April 16, after the Securities and Exchange Commission stunned investors by charging the company with fraud in connection with its marketing of a subprime-mortgage-related investment in 2007.

Although most bank stocks were lower Monday amid investor jitters over the financial system overhaul bill pending in the Senate, Goldman’s drop was double the 1.7% loss of the average financial stock in the Standard & Poor’s 500 index.

Blankfeinl Goldman on Monday released the prepared testimony that Chairman Lloyd Blankfein will give to the Senate Permanent Subcommittee on Investigations, which for 18 months has been probing the role big banks played in the financial crisis.

Blankfein’s remarks echo the company’s response over the weekend to company e-mails and other documents released by Sen. Carl Levin (D-Mich.), the investigations subcommittee’s chairman. Levin accused Goldman of being a “self-interested promoter of risky and complicated financial schemes that helped trigger the [financial] crisis.”

He also accused Goldman of trading against its own clients by selling them mortgage-related securities, then betting against the housing market by “shorting” such securities by engineering trades that would pay off if the investments plunged in value.

Levin released another batch of company e-mails and documents on Monday, and reiterated his allegation that Goldman made “billions of dollars from betting against the housing market . . . in some cases at the same time it was selling mortgage-related securities to its clients. They have a lot to answer for.”

Blankfein, in his prepared remarks, will tell the Senate that Goldman was “not consistently or significantly net ‘short the market’ in residential mortgage-related products in 2007 and 2008.” The firm, he asserts, was simply using short positions to be prudent. “We believe that we managed our risk as our shareholders and our regulators would expect.”

But the Goldman chairman also takes a stab at sounding contrite -- sort of:

As you know, ten days ago, the SEC announced a civil action against Goldman Sachs in connection with a specific transaction. It was one of the worst days in my professional life, as I know it was for every person at our firm. We believe deeply in a culture that prizes teamwork, depends on honesty and rewards saying no as much as saying yes. We have been a client centered firm for 140 years and if our clients believe that we don't deserve their trust, we cannot survive.

While we strongly disagree with the SEC's complaint, I also recognize how such a complicated transaction may look to many people. To them, it is confirmation of how out of control they believe Wall Street has become, no matter how sophisticated the parties or what disclosures were made. 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.

-- Tom Petruno

Photo: Lloyd Blankfein. Credit: Matthew Cavanaugh / EPA

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