Industry Updates

After Goldman Sachs’ settlement: RBS to seek more, Tourre denies fraud charges

Tuesday, July 20, 2010

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Opalesque Industry Update – The U.S. Securities and Exchange Commission (SEC) gained a victory with the record $550m fine it slapped on financial giant Goldman Sachs Group Inc., to settle a civil lawsuit that claimed the bank had misled investors about a controversial subprime mortgage product it sold in 2007.

The SEC was not unanimous in its decision over the landmark civil case against the bank, the Wall Street Journal reported.

But while the amount may be the largest in banking history, the conventional wisdom in Wall Street is that the settlement was a victory for Goldman because the penalty was not large enough for a firm its size. The agreement will also benefit Goldman since the U.S. regulator did not require the bank to admit to any wrongdoing.

Early estimates by analysts had placed the cost of settlement to be over $1bn, according to Bloomberg. With the civil claims behind it, Goldman Sachs has ended a three month-old public relations nightmare.

News of the settlement added $3bn to Goldman’s market value on Thursday, and it further climbed after the close of the New York Trading, the report added.

"They pay $550m and they get an $800m pop in their stock price—they got off easy,'' Kevin Caron, a market strategist at Stifel, Nicolaus & Co in Florham Park, New Jersey told CNBC.

The suit, filed on April 16, accused Goldman Sachs of misleading its investors into buying collateralized debt obligations (CDOs) that one of its clients, hedge fund billionaire John Paulson, was betting on to fail. However, the criminal case against one of Goldman’s executives, Fabrice Tourre, who is central to the case, will not be dropped.

On Monday (July 19), Fabrice Tourre denied the charges being hurled against him, saying he had relied on Goldman’s legal and compliance department. He dismissed allegations he had misled or omitted facts in relation to the sale of the Abacus 2007-AC1 product.

RBS to seek more from Goldman
German bank IKB Deutsche Industriebank will get $150m out of the $550m Goldman agreed to pay. The money represents the whole amount IKB lost in the CDOs, CNBC said.

UK-owned Royal Bank of Scotland (RBS) will be receiving $100m from the settlement deal. However, RBS said on Friday it would “carefully consider all of its options” and try to squeeze out more money from Goldman.

RBS lost $841m on the subprime product known as Abacus 2007-ACI. Goldman’s settlement with the SEC allows RBS to file future civil suits and ask for $741m more to recover all its losses from the transaction.

Goldman will report its second-quarter results today. Some analysts have predicted the bank would perform 35% down because of the controversy.
-Precy Dumlao

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