Goldman eyes redemption road, despite potholes

By Steve Eder – Analysis

NEW YORK (BestGrowthStock) – The rest of Wall Street’s pain is Goldman Sachs Group Inc’s (GS.N: ) gain, but Wall Street’s dominant firm is not off the hook just yet.

As subpoenas arrived at the doorsteps of Goldman’s rivals this week, Wall Street’s top firm enjoyed some company in the spotlight and a welcome break from being the sole target of prosecutors, lawmakers, and the media.

But Goldman is not quite on redemption road, some investors and analysts say, as it still faces public relations and legal hurdles ahead. Even over the past week, Goldman shares — down 0.3 percent — underperformed the sectoral Amex Securities broker dealer index (.XBD: ), which gained 1.3 percent.

“They have company in the doghouse, but they are still in the doghouse,” said Michael Robinson, a financial and crisis public relations consultant with Levick Strategic Communications. “They were the first ones in and they were the highest profile. That others are believed to have done the same thing doesn’t lessen the need to try to make this story go away as soon as possible.”

On Thursday, sources said that U.S. prosecutors and the New York Attorney General were conducting broad criminal investigations into Wall Street banks, probing their roles in the subprime mortgage crisis and what they told investors and credit ratings agencies.


For the past month, Goldman has been at the center of a Wall Street dragnet.

The U.S. Securities and Exchange Commission accused Goldman on April 16 of civil fraud in connection with its marketing of a subprime mortgage product called ABACUS.

The SEC accused Goldman of failing to tell investors who bought risky debt tied to subprime mortgages that hedge fund manager John Paulson helped select the underlying portfolio for a mortgage-linked security and was shorting the deal.

Goldman was also the first Wall Street bank to be reported to be under the microscope of criminal investigators as it relates to the subprime mortgage crisis.

Since the SEC’s probe, Goldman shares have dropped more than 20 percent, Chief Executive Lloyd Blankfein has launched a public relations offensive, and even admitted the scrutiny has put a “strain” on clients.

To be sure, Goldman seems to have found a bit of redemption of late and there have been several reminders lately of its dominant position on Wall Street — which its critics have sometimes tarred as rife with conflicts of interest or even “squid-like.”

First, it reported that it had zero days of trading losses during the first quarter, the first time it has accomplished such a feat — although it wasn’t the only bank to score a “perfect game” for the period.

Then its private equity arm appeared to be in the final stages of an agreement to buy a $1 billion stake in Taikang Life, China’s No. 4 life insurer.

And on Friday, industry sources told Reuters that Goldman had purchased Calgary-based Nexen Inc’s (NXY.TO: ) North American natural gas trading book, in another reminder of the diverse markets in which the firm plays a key role.

Goldman has also joined efforts to rescue ShoreBank, a politically-connected bank in Chicago — a move that could win it points from Washington, where just weeks ago Blankfein and other executives were grilled by a Senate panel.


The news that investigations had broadened to include rivals like Morgan Stanley (MS.N: ) (Read more about the money market today. ), JPMorgan Chase & Co (JPM.N: ), Citigroup Inc (C.N: ) and Bank of America Corp (BAC.N: ) was perhaps the most significant, as the other banks provided some cover after weeks of negative publicity.

But there is a feeling that Goldman still is playing the lead role in the unfolding saga, and it will continue to have more to explain to clients.

“I don’t think the ABACUS shadow has gone away,” said Lawrence White, a professor at New York University’s Stern School of Business. “They were named in a suit. It is more than just an investigation and it is going to carry weight.”

He added: “Entities like CalPERS (the largest U.S. public pension fund) may think twice before dealing with Goldman.”

Along those lines, Goldman is facing a possible lawsuit by former Australian clients who say the bank misled them into over-paying for stocks under derivatives deals.

Insurer American International Group Inc (AIG.N: ) also said this week it was reviewing its dealings with all of its counterparties during the financial crisis, including Goldman.

And even as U.S. prosecutors wrap other banks into the ongoing probe, many of those are Goldman’s chief trading partners. The pressure on the industry does not serve Goldman well.

“The broadening out of the investigation just makes the whole industry look worse, which Goldman is a part of,” said Walter Todd, a portfolio manager at Greenwood Capital, which owns Goldman debt.

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(Reporting by Steve Eder, editing by Gerald E. McCormick)

Goldman eyes redemption road, despite potholes