Banking giant Goldman Sachs urges clients to stay with them despite fraud charges

News - Banking

Written by Ray Clancy

Friday, 23 April 2010 09:15

One of the world’s most successful banks, US Goldman Sachs Group, is urging clients not to desert its business as it faces fraud charges over allegedly misleading sub prime mortgage products.

The giant Wall Street bank is facing allegations from the US Securities and Exchange Commission over the way it structured and marketed a product tied to subprime mortgages.

Its chief executive, Lloyd Blankfein, is also due to testify before a US Senate subcommittee next week to testify about the role of investment banks in the subprime mortgage disaster.

Fabrice Tourre, the London based Goldman employee who was charged by the SEC, is also scheduled to testify, along with Goldman chief financial officer David Viniar and managing director Michael Swenson.

One high-profile client, private equity firm Blackstone Group, has said publicly that it would stick with Goldman. Goldman has denied the SEC charges, and is calling clients and sending emails rejecting the accusations.

Goldman says it would never condone one of its employees misleading anyone, certainly not investors, counterparties or clients. ‘Were there ever to emerge credible evidence that such behaviour indeed occurred here, we would be the first to condemn it and to take all appropriate actions,’ the bank said.

But German bank BayernLB said the severity of the accusations against Goldman prompted it to sever ties with the bank. ‘Even if (SEC) proceedings are still underway, in which the presumption of innocence must prevail, the accusations levelled against your institution are so severe that the Bavarian landesbank, which is itself under close scrutiny and needs to adhere to the highest ethical standards, feels compelled to take this step,’ it said in a letter.

Robert Khuzami, the SEC’s new enforcement director, said the product was new and complex but the deception and conflicts are ‘old and simple’.

The SEC said that Tourre, who in 2007 was a vice-president at Goldman Sachs’ New York office, collaborated with Paulson & Co, one of the biggest hedge fund managers, to create a mortgage-backed product that they doomed to fail by purposely filling it with risky loans to poor people.

Goldman Sachs then allegedly lied about the types of mortgage that the product contained to investors who bought the product as well as the banks that insured it, causing them to lose more than $1 billion.

Goldman Sachs said that the charges are ‘completely unfounded in law and fact’ and that they will be ‘vigorously contested’.