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Britain, Germany weigh action against Goldman Sachs

Bloomberg  |  London/Berlin 

Britain joined Germany in calling for a probe of Group Inc after the (SEC) said it was suing the company for fraud.

UK Prime Minister said he wanted the Financial Services Authority to open an inquiry, declaring he was “shocked” at the “moral bankruptcy” indicated in the suit. The German financial regulator, Bafin, asked the SEC for details on the suit, a spokesman for Chancellor said.

“This is probably one of the worst cases we’ve seen,” Brown said on the BBC’s program in London today. “It looks as if people were misled about what happened. The banks are still an issue. They are a risk to the economy.”

The investigations widen the threat to the New York-based bank, which on April 16 denied wrongdoing. The US regulator accused of fraud tied to collateralised debt obligations that contributed to the financial crisis.

“We will see politicians throughout the world piling on Goldman Sachs,” said Scott Moeller, a former investment banker now teaching at Cass Business School in London. “Now they have vulnerability. Everyone and anyone, especially politicians, are going to try to make hay with this one.”

Fiona Laffan , a spokeswoman for Goldman Sachs, and Heidi Ashley, a spokeswoman for the FSA, declined to comment.

Link to UK
Group Plc, mostly owned by the UK government, paid $841 million to to unwind its position in the Abacus security, which it inherited when it bought ABN Amro in 2007, according to the SEC filing.

The bank used the Abacus, the word for a relatively crude counting tool involving the shuffling of beads, to off-load the risk of mostly subprime home loans and commercial mortgages to investors, either as hedges for similar positions or to bet against securities itself.

While the data show Goldman Sachs issued at least $7.8 billion of Abacus notes, the risk passed to investors was multiples higher.

The Abacus transactions are so-called synthetic collateralized debt obligations (CDO), which marry two financial innovations that contributed to the worst collapse in financial since the Great Depression.

The SEC also cited Dusseldorf-based IKB Deutsche Industriebank AG as a purchaser of part of the CDO at issue. In 2008, Germany’s state-owned KfW development bank pumped almost Euros 10 billion into IKB to shore up the German banking system.

The German government “will ask the SEC for information,” said Ulrich Wilhelm , a spokesman for Merkel. “Then we will look at the records and consider possible legal steps.”

It’s too early to say whether any legal action will relate to IKB, Wilhelm said. “First we have to ask for information,” he said.

First Published: Mon, April 19 2010. 00:49 IST