Goldman Sachs earns $3.3B as fraud case looms

April 21, 2010 at 12:00a.m.

Associated Press

NEW YORK

Goldman Sachs reaffirmed its leadership among Wall Street banks as it reported its first-quarter profits doubled. But the news was overshadowed by the investment bank’s growing legal problems.

As Goldman Sachs Group Inc. executives conducted conference calls with banking industry analysts and reporters Tuesday, the questions focused more on the Securities and Exchange Commission’s civil fraud charges against the company rather than its $3.3 billion earnings.

And the company came under scrutiny abroad. Britain’s financial regulator said it had begun an investigation into Goldman Sachs International, the bank’s London-based operations. The announcement from the Financial Services Authority follows pressure from Prime Minister Gordon Brown, who over the weekend accused Goldman of “moral bankruptcy” for planning to pay big employee bonuses despite the investigation.

The SEC charges grow out of a 2007 transaction involving collateralized debt obligations, or CDOs, exotic mortgage-related securities that many analysts say helped accelerate the financial crisis and recession. The government said Goldman Sachs did not tell two clients that the CDOs they bought were crafted in part by billionaire hedge-fund manager John Paulson, who was betting on them to fail.

There were signs that there were political overtones to the case. The SEC commissioners approved the charges by a narrow 3-2 vote, according to two people with knowledge of the case. The split was along party lines, with both Republican commissioners arguing strenuously to hold back, said the people, who spoke on condition of anonymity because they were not authorized to discuss the matter.

Goldman Sachs and the other big banks have come under sharp criticism in the Obama administration and in Congress, especially since they have paid big bonuses to employees after having accepted bailout money during the financial crisis in 2008. Goldman Sachs was one of the first banks to repay the money under the Troubled Asset Relief Program. But many critics are mindful that big banks’ trading practices helped cause the 2008 financial crisis.