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Goldman Sachs has shown with its eye-popping quarterly profits that it is still the king of Wall Street, but the crown has lost some of its luster.
Four days after being accused by the government of fraud in the subprime mortgage mess, the big investment bank reported blowout first-quarter earnings Tuesday of $3.3 billion, nearly double from the same period a year ago. But it didn't get to celebrate.
Goldman spent the day defending itself against the Securities and Exchange Commission's charges and saw its troubles mount:
- Britain's financial regulator began an investigation into the bank's London-based international operations.
- The European Commission called for tighter regulation of the complex financial investments at the heart of the SEC case.
- Investors brushed off the earnings and sent Goldman's stock falling more than 2 percent. In the past three days, the company's market value has declined by nearly $13 billion.
Jack A. Ablin, chief investment officer at Harris Private Bank in Chicago, said he couldn't recall another time when a company reported such stellar earnings only to see its stock fall.
The day's events showed how a powerhouse like Goldman can be humbled. The same prowess in cutting deals and making billion-dollar bets that vaulted Goldman to the top of Wall Street is now being faulted, even vilified.
Goldman Sachs Group Inc. executives held conference calls with banking industry analysts and reporters Tuesday, but the questions focused more on the SEC charges than on the firm's earnings.
The charges grew out of a 2007 transaction involving collateralized debt obligations, or CDOs, complex mortgage-related securities that many analysts say helped accelerate the financial crisis and recession when they plunged in value. The government said Goldman 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. Goldman has denied the charge.
"Clearly, there's a potential for things to get worse," market analyst Edward Yardeni said, citing the widening probe of the bank's dealings. "The question is how will their clients react."
There were growing political overtones to the case, which comes as Congress debates the Obama administration's proposal to overhaul the nation's financial rules.
The SEC commissioners approved the charges by a 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.
Party-line split votes are unusual, especially in high-profile cases, former SEC officials said.
SEC Chairwoman Mary Schapiro told reporters on Capitol Hill on Tuesday that the charges against Goldman were "absolutely not" politically motivated.
But Ablin said the vote's timing and the party-line split raise questions about whether the case against Goldman was aimed at swaying public support for the administration's effort to impose tighter controls on Wall Street.
"To me, this case is less about Goldman and more about financial reform," he said.
The slide in the company's stock could be a sign that investors believe financial reform will become law - and banks' profitability will suffer as a result, Ablin said.
Goldman and the other big banks have come under sharp criticism from the Obama administration and Congress, especially since they have paid big bonuses to employees after having accepted bailout money during the financial crisis in 2008. Goldman was one of the first banks to repay the money under the Troubled Asset Relief Program. Many critics note that big banks' trading practices helped cause the crisis.
Goldman's trading of bonds, commodities and currencies helped the company score another impressive quarter.
The firm earned $5.59 a share on revenue of $12.78 billion, above forecasts of analysts surveyed by Thomson Reuters. It was Goldman's second most profitable quarter since going public in 1999. In the fourth quarter, Goldman earned a record $4.79 billion.
Yet investors remained fixated on Goldman's legal battles.
During a conference call with analysts, Goldman co-general counsel Greg Palm gave the company's most detailed rebuttal to date of the SEC charges.
The SEC charged that Goldman misled investors. Palm responded that the two clients in the transaction, IKB Deutsche Industriebank AG and the financial consulting firm ACA Management LLC, "were institutions with significant resources and extensive experience in the CDO market."
"We would never intentionally mislead anyone," Palm said.
The company told analysts that it lost more than $100 million on the transaction. Analysts have speculated that Goldman lost money because it was unable to sell its position before its value declined. Asked about that, Palm acknowledged for the first time that the bank did indeed try to find a buyer.
Goldman also said the executive at the center of the case, Fabrice Tourre, is on indefinite paid leave and is no longer registered in Britain to do business on the bank's behalf or to deal with clients.
Tourre was a vice president in his late 20s when the alleged fraud was orchestrated in 2007. Tourre, now 31, has since been promoted to executive director of Goldman Sachs International in London.
This program aired on April 21, 2010. The audio for this program is not available.
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