So the Manhattan DA has shown his hand and issued Goldman with a subpoena relating to its activities in sub-prime mortgage CDOs in the run-up to the financial crisis. It’s likely that Cyrus Vance’s office will only seek information from Goldman about the securities that were covered in Senator Levin’s April 2011 report, which itself only focused on those that were discussed at his Permanent Subcommittee on Investigations’ hearings a year earlier. On that basis, all the information he could possibly require has been in the public domain for some considerable time.
Even so, this saga could be interminable. The Department of Justice and the SEC are reviewing Levin’s report, and could spring into action at some point, as could the New York State Attorney-General’s office. All we’d need then is for the NYPD, CSI, and what the hell, why not get the New York City Police Department Band all involved in consecutive investigations, and Lloyd Blankfein will have been cast as a modern-day Sisyphus, the mythological Greek king who was condemned to roll a huge boulder all the way up a hill, watch it roll back down, and repeat the process for eternity.
Keith Mullin, Editor at Large, International Financing Review
Actually, the prospect of a multitude of agencies issuing subpoenas, poring over identical information and still not getting CDOs or market-making may make the hill and the boulder look like a less frustrating option.
The one thing the Manhattan DA has that federal prosecutors don’t is the Martin Act, enshrined under New York securities law. While federal prosecutors have to prove ex-ante intent to defraud in order to bring a criminal prosecution, under the Martin Act state prosecutors only have to find material misrepresentation in a securities offering, which has a much lower burden of proof. This is a powerful weapon that, observers say, could give state prosecutors grounds to bring individual criminal actions against Goldman executives even where federal actions have failed.
That said, few people really believe the subpoena will lead to criminal charges. Dick Bove, an analyst at Rochdale Securities, said the government is looking for a bank to punish for the financial crisis and has selected Goldman. “They want Goldman Sachs to show some sort of contrition,” he told Reuters. “The blood is in the water and the sharks will all come.”
Brad Hintz, an analyst at Sanford C. Bernstein, reckons Goldman is too big to fail and that criminal proceedings would not just threaten Goldman but the US financial system. Jacob Frenkel, a former SEC enforcement lawyer and now a partner at law firm Shulman Rogers, is confident that Goldman will not be charged in a criminal case and that the subpoena is a fishing expedition.
Kian Abouhossein, an analyst at JP Morgan, has lifted his rating on Goldman from ‘neutral’ to ‘overweight’ and believes the market is over-reacting to headline risk. Jeffery Harte, an analyst at Sandler O’Neill, also has a buy on Goldman stock. In an interview with Bloomberg TV, he noted that Goldman’s current price-to-book implies an ROE of around 11%, whereas ROE has averaged north of 20% since the firm’s IPO in 1999. He says that at these levels, the market believes Goldman’s earnings power has been cut in half. Harte doesn’t think this is the case, which he says makes the stock a buy.
Charles Peabody, an analyst at Portales Partners, who likewise believes Goldman is too big to prosecute, reckons one potential outcome is a negotiated settlement where the firm pays a fine, (presumably without admitting guilt) and agrees to a series of internal operating changes.
That sounds like a plan. Goldman’s own worst-case estimate for litigation losses stands at US$2.7bn. In the grand scheme of the firm’s ability to generate revenue, it’s not a lot of money, equal in fact to the firm’s 1Q11 net earnings. If I were Lloyd Blankfein, I’d be sorely tempted to give up a couple of billion dollars now if I could make it all go away in a multi-agency once-and-for-all settlement.
Goldman has so far been very quiet in its public reaction to the investigative vigour shown by the government and its agencies. But that could be about to change. According to the Wall Street Journal, Goldman plans to push back on the Senate committee’s findings, claiming “sloppy math and incomplete analysis” This could be just what’s needed to turn this one-way barrage into an old-fashioned scrap.