People walk to work outside the Goldman Sachs headquarters, center, Monday, April 19, 2010, in New York. Stocks are falling on concerns about the fallout over Goldman Sachs being charged with civil fraud tied to its dealings in bonds backed by sub-prime mortgages. (AP Photo/Mark Lennihan)
European Banks Sink On Fears Of More CDO Fraud Charges (Dow Jones):
Shares in European banks with big investment banking arms were under pressure Monday on fears they could face similar fraud accusations to the U.S. Securities and Exchange Commission’s Friday charge against Goldman Sachs Group Inc. (GS).
At 0950 GMT, UBS AG (UBS) stock was down CHF0.63, or 3.5%, at CHF17.30, Deutsche Bank AG (DB)was down EUR0.80, or 1.4%, at EUR54.69 and HSBC Holdings PLC (HBC) fell 14 pence, or 1.9%, to 684 pence.
Analysts Monday said the 13% sell-off in Goldman shares Friday looks overdone, but that it highlights how Goldman and other banks are at risk of further litigation related to complex transactions they sold in the lead-up to the financial crisis.
The SEC charges come as investment banks face a host of regulatory reforms that would require them to hold more capital and potentially restrict their activities, a prospect that is seen tempering share gains fueled by strong earnings such as those reported by JP Morgan Chase & Co. (JPM) last week for the first quarter.
“With little visibility on what follows this case and whether other banks will also be sued, in the near term the fallout from such actions could potentially overwhelm the likely stronger than expected-revenue-performance from investment banks,” said Raul Sinha, a banks analyst at Nomura.
The SEC on Friday alleged that Goldman Sachs duped clients by selling them a financial instrument secretly designed by hedge-fund firm Paulson & Co., which then made a $1 billion profit by betting on the deal’s downfall. It said it will also look closely at similar transactions from other firms.
Goldman Sachs rejected the claims, saying the suit is unfounded “in law and fact.”
The SEC said Paulson & Co. doesn’t face charges in the Goldman case.
With the issue of misselling now in the spotlight, investors are braced for what could be another wave of losses for banks that were heavily involved in marketing collateralized debt obligations. The roughly $2 trillion CDO market was rocked by the rapid deterioration in subprime mortgages in 2007, leading to widespread downgrades to CDO transactions backed by the mortgages and massive losses at banks exposed to the deals.
Meanwhile, other banks including UBS AG are involved in private lawsuits charging that they constructed CDOs linked to assets they allegedly knew would soon be downgraded by ratings agencies. UBS declined to comment Monday.
British, German regulators to probe Goldman’s sale of mortgage securities (Washington Post):
Financial regulators in Britain and Germany said Monday that they will open investigations to see whether Goldman Sachs’s sale of mortgage securities broke any local laws after the disclosure that two European banks lost money on what U.S. officials allege were fraudulent deals.
London’s Financial Services Authority and Germany’s BaFin regulatory agency said they were coordinating with the U.S. Securities and Exchange Commission’s investigation of Goldman’s sale of an investment that, the SEC charges, was structured to fail.
The Royal Bank of Scotland lost an estimated $850 million and the Duesseldorf-based IKB Deutsche Industriebank lost more than $100 million on mortgage-related securities set up by Goldman.
“The FSA is investigating the circumstances of this case and whether there are any implications for the U.K.-regulated entities of Goldman Sachs,” the FSA said. “If there are, we will take appropriate action.”
In Germany, a spokesman for bank regulator BaFin said the agency would “follow up” with the SEC to see what action might be appropriate.