The embattled Wall Street bank Goldman Sachs is edging close to accepting lesser charges — possibly involving an admission of negligence — to settle a US$1 billion fraud prosecution laid by US regulators last month.
An admission of failings by the bank, albeit far short of those alleged by the US Securities and Exchange Commission (SEC), would mark a substantial retreat from Goldman’s defiant response to the regulator’s civil fraud lawsuit, which it continues to argue is wrong “in fact and in law”.
The SEC alleges that the bank misled investors over the controversial sale in 2007 of a US$1 billion derivative investment called Abacus tied to a package of mortgage loans.
The prospect of Goldman admitting to shortcomings comes only a week after Warren Buffett, whose Berkshire Hathaway group has a major stake in Goldman, dismissed the SEC’s charges as misguided. But the episode has left the bank struggling to protect its reputation.
Tentative talks about a deal are to continue this week after a meeting today between Goldman’s lawyer and the SEC that signaled the first chink in a previously cast-iron insistence by the bank that it would fight the allegations.
Some analysts have speculated that the total cost of a settlement could be as much as US$1 billion, making it one of the largest in US history. The Wall Street Journal last week reported that some executives and powerful alumni of Goldman are discussing whether the bank’s chairman, Lloyd Blankfein, should resign to restore confidence in the company.
While Goldman is adamantly refusing to accept any charge of fraud over its Abacus mortgage deal, it is anxious for a swift resolution of the case and is willing to countenance a more modest accusation, possibly along the lines of negligence or poor administrative processes.
Goldman is concerned about an ongoing avalanche of bad publicity and a slide in its stock, which has fallen by 22 percent since the SEC laid charges in the middle of last month. But the SEC is in less of a hurry, wary that if it backs down, it could face public and political hostility for weakness against an institution with powerful connections.
The SEC claims that Goldman misled investors in Abacus by failing to come clean about the role of a hedge fund, Paulson & Co, that was going “short” to bet on Abacus slumping in value. The security duly dived as US housing prices slumped, leaving Royal Bank of Scotland, which backstopped liabilities, with a bill of US$840 million.
The US Department of Justice is examining possible criminal charges against Goldman and, in Britain, the Financial Services Authority is looking into the deal. Any admission of failures in a potential civil settlement will have to be carefully worded if it is not to influence a criminal investigation. The bank has also faced a flurry of lawsuits from shareholders who claim they should have been told earlier of an SEC probe.
Yet in spite of the controversy, investors gave overwhelming backing to Blankfein at Friday’s annual meeting by re-electing him with 95 percent of the vote.