Goldman Sachs Group Inc.’s efforts to burnish its reputation just got a lot tougher.
Chairman and Chief Executive Officer Lloyd Blankfein, 55, spent the last year defending the firm against criticism from politicians and pundits, who decried Goldman Sachs’s profit in the aftermath of the financial crisis and its sale of mortgage securities that went sour. Now the U.S. Securities and Exchange Commission is charging the company with fraud.
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On Goldman Sachs’s list of business principles, “clients’ interests always come first” ranks highest. The SEC paints a different picture. The firm failed to tell investors when selling them a so-called collateralized debt obligation tied to mortgages that the package had been designed to fail by hedge fund Paulson & Co., which profited from the losses, the agency alleged. Goldman Sachs said it will contest the case, calling it “completely unfounded in law and fact.” Shareholders weren’t comforted: The stock plunged the most in more than a year.
“The risk is long-term reputational,” said Benjamin Wallace, an analyst at Grimes & Co. in Westborough, Massachusetts, which manages $900 million and doesn’t own Goldman Sachs stock. “People are going to be more inclined to look at Goldman Sachs and think, ‘Who’s on the other side of this trade?'”
Goldman Sachs sank 13 percent to $160.70 in New York Stock Exchange composite trading, the biggest one-day percentage decline since January 2009. The cost to buy insurance against a default on Goldman Sachs debt jumped 35 basis points, or 0.35 percentage point, to 130.5 basis points in the biggest increase in a year.
The suit’s financial cost to Goldman Sachs, whose $13.4 billion profit last year set a record for a Wall Street securities firm, is likely to be manageable and a settlement is unlikely before 2011, according to Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York.
The “worst-case liability” if the SEC case succeeds would be $706.5 million hit to net income, or $1.20 in earnings per share, Hintz estimated in a note to investors yesterday. Follow- on claims from investors will “face a challenging hurdle” because the securities were sold in a private placement only available to sophisticated investors, Hintz said.
Some analysts said that a more important problem is that the SEC’s focus on Goldman Sachs shows the firm is under a harsher political and regulatory spotlight than competitors.
