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3rd Oct 2022

EU 'following' Goldman fraud case

  • RBS was one of big losers from the Goldman investment product (Photo: Wikipedia)

The European Commission has said it is closely monitoring the latest fraud case surrounding Wall Street investment bank Goldman Sachs, as allegations of mispractise draw sharp criticism in a number of European capitals.

"This is a fraud investigation that is being carried out in the United States. We are obviously following events with great interest," said commission spokeswoman Amelia Torres on Monday (19 April).

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The US Securities and Exchange Commission (SEC), the country's financial regulator, filed charges against Goldman late last week, accusing the company of failing to disclose full information to clients of one of its investment products, known as a collaterised debt obligation (CDO).

UK Prime Minister Gordon Brown attacked the famous bank over the weekend, accusing it of "moral bankruptcy", after the SEC listed the Royal Bank of Scotland, now 84 percent owned by British taxpayers following a series of government bail-outs, as one of the victims of the CDO at the centre of the case.

The US complaint alleges Goldman and Fabrice Tourre, a 31-year old vice president with the firm, hid from investors the fact that the hedge fund Paulson & Co had been influential in determining the composition of loans going into the CDO created by Goldman in 2007.

While most investors sought high returns from the structured finance product, Paulson placed bets that the mortgage-linked assets would fall.

Nine months after the creation of the CDO, 99 percent of its loans had been downgraded, netting $1 billion for Paulson & Co., and costing the Royal Bank of Scotland $841 million.

"Everything I find out convinces me that we have got to go in deeper, and I believe that I am the man to deal with these problems," said an election-mode Mr Brown.

Germany has also indicated its interest in the case. The country's IKB bank was an early victim of the credit crunch, losing almost the entirety of its $150 million investment in the Goldman CDO.

Chancellor Angela Merkel's spokesman, Ulrich Wilhelm, said the German regulator BaFin will ask the SEC for detailed information. "After a careful evaluation of the documents, we will examine legal steps," he said, report national media.

Analysts said the latest revelations could speed the passage of a US financial regulation bill set to hit the senate floor in the coming days, with a subsequent knock-on effect for Europe.

"Supposing the US adopts legislation before the summer, which is not impossible, this will then become the benchmark for the EU," Nicolas Véron, a financial services analyst with the Brussels-based Bruegel think-tank, told EUobserver.

EU internal market and financial services commissioner Michel Barnier is set to propose new legislation on financial derivatives this June, likely to lead to extensive debate between member states and inside the European Parliament.

France and other members of the G20 group of leading countries have pledged to regulate the $450 trillion global derivatives market by the end of 2012.

The US announcement of an investigation into Goldman last week comes on top of EU criticism earlier this year that Goldman helped Greece to hide the true extent its debt pile, using a different financial product known as a currency swap.

The bank has insisted no rules have been broken in either case.

Exclusive

EU officials were warned of risk over issuing financial warning

The European watchdog for systemic economic risk last week warned of "severe" threats to financial stability — but internal notes show top-level officials expressed "strong concerns" over the "timing" of such a warning, fearing publication could further destabilise financial markets.

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