Goldman sees challenges as profit dives

INVESTORS' nervousness about the uncertain economic outlook have dampened third quarter profits at Goldman Sachs.

The conditions led the American investment bank to declare yesterday conditions would continue to be “challenging”.

Trading revenues fell by more than 33 per cent in the third quarter as the bank’s clients stayed on the sidelines amid volatile market conditions.

David Viniar, chief financial officer, said: “The operating environment during the third quarter was dominated by heightened uncertainty surrounding the global economic outlook.”

Profits came in at $US1.9 billion ($1.96bn), down from $US3.19bn last year. Revenues fell 28 per cent to $US8.9bn.

However, the bank’s shares rose 2.7 per cent in afternoon trading as its 40 per cent fall in earnings was less than feared.

Reflecting the tougher times, Goldman cut its compensation pot. Employees, on average, stand to take home 30 per cent less in annual compensation than a year ago, based on its compensation accrual for the first nine months of the year.

Goldman has set aside $US13.1bn in compensation and benefits for the year to date, or $US370,706 per employee, excluding $US600m in second-quarter charges from the bank bonus tax in Britain.

Overall, compensation accrual is down 21 per cent from the $US16.7bn set aside at this time last year, when the compensation pool amounted to $US527,192 per employee.

The bank’s closely watched ratio of compensation and benefits to net revenues was 43 per cent during the first nine months of the year, against 47 per cent in the same period last year.

Goldman is attempting to rehabilitate its image three months after settling charges by the US Securities and Exchange Commission it misled investors over a complex investment created by the bank.

Goldman paid $US550m to settle the dispute.

Last week, a report by the SEC’s Office of Inspector-General concluded the lawsuit was fair. Goldman was also hit by a ₤17.5m fine by the Financial Services Authority for failing to tell it the trader Fabrice Tourre – at the centre of the SEC’s allegations – was under investigation when he took up a job at the bank’s London office in 2008.

Lloyd Blankfein, Goldman’s chief executive, said economic conditions continued to be “challenging” but he said he was pleased with the bank’s “solid” performance.

The results were partly buoyed by the performance of Goldman’s investment banking operations, where revenues rose 24 per cent to $US1.1bn.

No more “shitty” deals at Goldman

THERE will never be another “shitty” deal at Goldman Sachs Group, at least not in writing.

The New York company is telling employees that they will no longer be able to get away with profanity in electronic messages. That means all 34,000 traders, investment bankers and other Goldman employees must restrain themselves from using a vast vocabulary of oft-used dirty words on Wall Street, including the six-letter expletive that came back to haunt the company at a senate hearing in April.

“(B)oy, that timberwo(l)f was one shitty deal,” wrote Thomas Montag, who helped run Goldman’s securities business, in a June 2007 email that was repeatedly referred to at the hearing.

Mr Montag, who couldn’t be reached for comment, wouldn’t be allowed to send that e-mail under Goldman’s sanitised communications policy, which is being enforced by screening software. Even swear words spelled with asterisks are out.

A Goldman official said: “Of course, we have policies about the use of appropriate language and we are always looking for ways to ensure that they are enforced.”

The new edict – delivered verbally, of course – has left some employees wondering if the rule also applies to shorthand for expletives such as “WTF” or legitimate terms that sound similar to curses.

In the spirit of the times, there is no written directive specifying which curses are now officially cursed. But screening tools being used by the firm would detect common swear-words and acronyms.

Citigroup and JPMorgan Chase have policies against using swear-words in company email, according to the companies. Morgan Stanley tells employees that their email should be “professional, appropriate and courteous at all times”, but doesn’t specifically forbid naughty words.

NYSE Euronext “unofficially discourages” the use of profanity on the floor of the New York Stock Exchange, according to a spokesman, and frequently issues memos reminding traders to exercise proper decorum. It began enforcing the policy more aggressively after TV networks started broadcasting live reports from the floor, traders say.

CME Group, which owns trading pits in Chicago and New York, says traders are expected to conduct themselves “with dignity and integrity”. Its rulebook stipulates that the “use of profane, obscene or unbusinesslike language on the trading floor” could result in a fine. A first offence could be $US1000, while “an egregious violation” may result in a fine of up to $US20,000.

The use of profanity on Wall Street came up at Morgan Stanley’s annual meeting in May, where one shareholder asked chairman John Mack about bad words attributed to bankers and policy-makers in Too Big to Fail, a book about the financial crisis. “The language was probably stronger than what was in the book,” Mr Mack responded, in a nod to the ingrained habit of swearing on Wall Street.

Goldman’s employee emails have been a touchy subject ever since the Securities and Exchange Commission accused the firm in April of cheating clients by selling mortgage securities that were secretly designed by a hedge-fund firm to cash in on the housing market’s collapse.

This month, Goldman agreed to pay $US550 million ($615.6m) to settle the civil charges, without admitting or denying the allegations.

In June, Citigroup told employees in a memo that “recent headlines involving inappropriate emails are an important reminder to ‘think before writing, read before sending’.”

The bank ordered employees to take – within one month – a 10-minute online course called Improper Electronic Communications, which included a “briefing” on the “do’s and dont’s of electronic communications”.

Goldman’s no-swearing dictate covers instant messages and texts from company-issued cellphones and emails. Verboten emails could get bounced to the compliance department. Others might be blocked completely, depending on the severity of the language.

There are no set disciplinary measures for offenders, but habitual profaners will be summoned by their managers to discuss cleaning up their language.

The late comedian George Carlin famously aired the issue of taboo lingo in his 1972 monologue, Seven Words You Can Never Say on Television. One firm with a big presence on trading floors has an even bigger list.

New York-based media company Bloomberg LP says it has monitored emails for more than 10 years, using an application that scans messages for 70 words and phrases – in English and several other languages – considered profane.

When caught, an offending Bloomberg employee gets a pop-up message warning him or her not to send the message, which highlights the naughty word. Depending on the severity of the word, some emails will be blocked altogether from being sent. (The same technology also is available for clients of Bloomberg’s terminals.)

“There is case after case of email disaster that is reported in newspapers or media, and you would think that the last thing any rational person would do would be to speak carelessly or use profanity in email,” says Kendall Coffey, a former federal prosecutor and now a partner at law firm Coffey Burlington in Miami. “But it seems to be an unlearnable lesson.”

Among famous emails is one in which former Merrill Lynch stock analyst Henry Blodget used the acronym “POS” (a.k.a. “piece of shit”) to refer to a tech stock he was touting to the public on behalf of the bank. In 2003, Mr Blodget agreed to a lifetime ban from the securities industry after touting stocks that he disparaged in private emails. He couldn’t be reached for comment.

But using software to screen for obscenities doesn’t always work. Satellite-services provider Intelsat SA, of Luxembourg, a few years ago began screening email for profanities. But it found the level of emails that were wrongly captured was too high, and so it dropped the screening. It now relies on a policy of reminding employees of “appropriate language for external use”, a spokeswoman said.

And last year, JPMorgan had to briefly override its automated profanity detectors so it could write a press release that mentioned a charity called Feel Your Boobies Foundation. That is the name of a Pennsylvania breast-cancer prevention group, which got a grant from the bank.

Additional reporting by Mary Pilon and Scott Patterson

Goldman penalty a boost for Basis

NEWS of Goldman Sach's record fine to settle fraud charges in the US augurs well for Sydney-based hedge fund Basis Capital.

Basisis pursing its own litigation against the Wall Street giant.

Swiss-based investment manager David Mapley, a one-time independent director of the collapsed Basis Yield Alpha Fund, yesterday welcomed the settlement, which follows accusations that the bank misled investors about one of its collateralised debt products, known as Abacus.

“As a lawyer friend of mine put it, a $US550 million ($627m) fine for doing nothing wrong isn’t a bad start,” Mr Mapley told The Weekend Australian yesterday. “A precedent has been established . . . and from Basis’s perspective, our case is far, far stronger. This bodes very well for Basis’s case.”

Basis Capital is currently suing the bank in the US District Court in New York in a bid to recoup its initial investment in a series of high-risk debt securities. It is also seeking $US1 billion in damages.

The case — while relating to the issue of a different financial product called Timberwolf — also hinges on claims that the bank withheld crucial information from prospective investors.

Basis Capital is claiming that Goldman and its local affiliate Goldman Sachs JBWere engaged in fraud when it sold the Basis Yield Alpha Fund the Timberwolf securities in mid-2007.

It is alleged that the banking group made “materially misleading statements and omissions” in relation to the June 2007 purchase of $38.6m of AA-rated securities and $42.1m of AAA-rated securities.

A spokesman for Basis Capital declined to comment on the landmark settlement yesterday.

However, it is understood that the firm is eager to press ahead with its lawsuit.

Sources familiar with the case claimed that Basis Capital and its legal advisers were “heartened” by recent events.

“This settlement appears to apply just to the Abacus security, which means that Goldmans is still open to a whole range of other actions,” one source said.

As the man who blew the whistle on Goldmans by taking his concerns to the US Securities and Exchange Commission following Basis’ collapse, Mr Mapley has been keeping a close eye on the case.

The former Macquarie Bank executive, who now chairs the global financial consultancy, Shimoda Group, agreed that the settlement deal opened the door to a raft of fresh claims against the bank. “This is nowhere near over,” he said. “While it’s not an omission of guilt (by the bank), it paves the way to encourage investors who’ve lost a lot of money to examine their own situations.

“And I would expect the Australian Securities & Investments Commission will see that the SEC has done a good job and be even more encouraged to do something for the Australian investors who lost money.”

Former Fairfax chief executive Fred Hilmer and Roger Allen, a co-founder of venture capital firm Allen and Buckridge, are among several high-profile investors to have lost money when the Basis Yield Alpha Fund was frozen and placed into liquidation, after the value of its investments plunged due to the US housing crisis.

But ASIC has so far resisted calls to investigate the matter.

A spokeswoman from the regulator declined to comment on the settlement last night.

Goldman Sachs has repeatedly denied any wrongdoing and says it will defend Basis’ claims.

Aussie fund sues Goldman Sachs for $1.2bn

BURNED investors in a hedge fund run by Australia's Basis Capital, including former Fairfax Media chief Fred Hilmer, yesterday held out hope of recovering some of their losses after the group launched an unprecedented $US1 billion ($1.2bn) lawsuit against Wall Street bank Goldman Sachs.

In the continuing fallout from the subprime mortgage crisis of 2007, Basis yesterday accused Goldman of fraudulently selling one of its hedge funds $US78 million worth of a now notorious investment product called Timberwolf.

Timberwolf – a “collateralised debt obligation” that packaged thousands of US home owners’ mortgages – forms part of the US Securities and Exchange Commission’s massive fraud case against Goldman for allegedly misleading investors about highly complex securities linked to the mortgage market.

Goldman dismissed the suit from Basis, filed in the US District Court for the Southern District of New York, as being “without merit”, and said it was an attempt by a sophisticated investor to blame the investment bank for its losses.

But Basis alleged in its suit that Goldman pitched the Timberwolf CDOs to its Yield Alpha Fund in 2007 knowing they were doomed to fail. In one email cited in the suit, a Goldman employee described Timberwolf in internal emails as “one shitty deal” just days after the company completed the sale to Basis. Basis claims Goldman had been betting against the CDO market since 2006.

The once $500m fund imploded in late 2007 owing large super funds, charities, individuals and the fundraising body behind Perth’s Princess Margaret Hospital for Children, nursing about $320m in losses.

Mr Hilmer, now Vice-Chancellor of the University of NSW, told The Australian yesterday he had lost all of the $300,000 of private superannuation funds he invested in the Yield Alpha Fund. “Of course, I am disappointed the money is lost,” he said. “I hope the managers are doing everything that is responsible to recover it.”

Roger Allen, co-founder of venture capital firm Allen and Buckridge, said one of his companies lost “hundreds of thousands” of dollars in the collapse of the Yield Alpha Fund. He supported any attempt by Basis – which still operates though its fund is frozen – to recover the money.

The Princess Margaret Hospital Foundation invested $1.4m of its then $12m portfolio with Basis Capital. Chief executive Don McLean, who joined the charity after the episode, said it had written off the entire value of the investment.

Former Basis outside director David Mapley told US regulators about the Timberwolf transaction in January 2008, and it became a key part of the investigation into Goldman’s subprime dealings.

Eric Lewis, an attorney from Baach Robinson & Lewis, which is representing Basis, said Goldman “was pressuring investors to take the risk of toxic securities off its books with knowingly false sales pitches”. The suit seeks injury and damages of no less than $US56m, and more than $US1bn in punitive damages.

Goldman said: “The lawsuit is a misguided attempt by Basis, a hedge fund that was one of the world’s most experienced CDO investors, to shift its investment losses to Goldman Sachs.”

Additional reporting: Dow Jones Newswires

Aussie fund sues Goldman Sachs for $1.2bn

BURNED investors in a hedge fund run by Australia's Basis Capital, including former Fairfax Media chief Fred Hilmer, yesterday held out hope of recovering some of their losses after the group launched an unprecedented $US1 billion ($1.2bn) lawsuit against Wall Street bank Goldman Sachs.

In the continuing fallout from the subprime mortgage crisis of 2007, Basis yesterday accused Goldman of fraudulently selling one of its hedge funds $US78 million worth of a now notorious investment product called Timberwolf.

Timberwolf – a “collateralised debt obligation” that packaged thousands of US home owners’ mortgages – forms part of the US Securities and Exchange Commission’s massive fraud case against Goldman for allegedly misleading investors about highly complex securities linked to the mortgage market.

Goldman dismissed the suit from Basis, filed in the US District Court for the Southern District of New York, as being “without merit”, and said it was an attempt by a sophisticated investor to blame the investment bank for its losses.

But Basis alleged in its suit that Goldman pitched the Timberwolf CDOs to its Yield Alpha Fund in 2007 knowing they were doomed to fail. In one email cited in the suit, a Goldman employee described Timberwolf in internal emails as “one shitty deal” just days after the company completed the sale to Basis. Basis claims Goldman had been betting against the CDO market since 2006.

The once $500m fund imploded in late 2007 owing large super funds, charities, individuals and the fundraising body behind Perth’s Princess Margaret Hospital for Children, nursing about $320m in losses.

Mr Hilmer, now Vice-Chancellor of the University of NSW, told The Australian yesterday he had lost all of the $300,000 of private superannuation funds he invested in the Yield Alpha Fund. “Of course, I am disappointed the money is lost,” he said. “I hope the managers are doing everything that is responsible to recover it.”

Roger Allen, co-founder of venture capital firm Allen and Buckridge, said one of his companies lost “hundreds of thousands” of dollars in the collapse of the Yield Alpha Fund. He supported any attempt by Basis – which still operates though its fund is frozen – to recover the money.

The Princess Margaret Hospital Foundation invested $1.4m of its then $12m portfolio with Basis Capital. Chief executive Don McLean, who joined the charity after the episode, said it had written off the entire value of the investment.

Former Basis outside director David Mapley told US regulators about the Timberwolf transaction in January 2008, and it became a key part of the investigation into Goldman’s subprime dealings.

Eric Lewis, an attorney from Baach Robinson & Lewis, which is representing Basis, said Goldman “was pressuring investors to take the risk of toxic securities off its books with knowingly false sales pitches”. The suit seeks injury and damages of no less than $US56m, and more than $US1bn in punitive damages.

Goldman said: “The lawsuit is a misguided attempt by Basis, a hedge fund that was one of the world’s most experienced CDO investors, to shift its investment losses to Goldman Sachs.”

Additional reporting: Dow Jones Newswires

Fund’s $1bn Goldman claim

INVESTMENT bank Goldman Sachs is being sued for more than $1 billion by an Australian hedge fund that has accused the bank of fraud by selling it “shitty” complex US mortgage products that led to its collapse.

Basis Capital has claimed in a New York court filing that Goldman Sachs engaged in “securities fraud and common law fraud” in 2007 when it sold the Basis Yield Alpha Fund (Master) a range of collateralised debt obligations, named Timberwolf.

Former Goldman mortgage executive Tom Montag is claimed to have described Timberwolf as “one shitty deal” in the same week Basis and Goldman were finalising their deal.

It is alleged that Goldman and its affiliated companies made “materially misleading statements and omissions” in relation to the June 2007 purchase of $38.6 million of AA-rated securities and $42.1m of AAA-rated securities.

Sydney-based Goldman executive George Maltezos is said to have emailed cashflow projections from Goldman’s New York office to Basis between April and June 2007, according to the court documents, but the bank failed to include key information, rendering the cashflows “misleading and deceptive”.

Basis began receiving margin calls just two weeks after buying the Timberwolf securities, and within a month the products had dropped in value by more than $30m. Basis says it was then forced into liquidation in August 2007.

The case is the second recent claim of major fraud brought against Goldman.

In April, it was accused by the US Securities and Exchange Commission of a $US1 billion investor fraud in collusion with a hedge fund in 2007.

It was claimed Goldman deceived its clients by selling mortgage securities secretly designed by a John Paulson hedge fund which, at the same time, was shorting the US property market.

The Basis and the SEC claims against Goldman coincide with one of the largest legal and regulatory clashes seen on Wall Street.

In a statement, Goldman said it believed the Basis case was “without merit” and emphasised it had lost “several hundred million” dollars on its holdings during the Timberwolf transactions.

“The lawsuit is a misguided attempt by Basis, a hedge fund that was one of the world’s most experienced CDO investors, to shift its investment losses to Goldman Sachs,” a spokesperson said.

“Basis made its investment at market levels — levels that it deemed attractive. These levels were substantially below the face value of the securities and consistent with where other investors were purchasing the same Timberwolf securities during the same time period.

“Basis is now trying to recoup its losses based on false allegations that it was misled about aspects of the transaction and market conditions.”

The local operations of Goldman Sachs JBWere in Australia are named as a defendant in the suit, which is making global headlines. Mr Maltezos is named as the local link between Goldman’s Australian and New York offices.

Basis says it lost at least $56m but says it should receive “in excess of $1 billion” in damages “to punish and deter Goldman with respect to its pervasive fraudulent practices”.

The Basis Yield Alpha Fund (Master) was worth $1.5bn, meaning the Timberwolf investment was a minor component of the overall fund’s value.

It is alleged that Goldman usedthe Timberwolf product as a key part of its strategy to earn fees while also “claiming out left over positions”.

“That is, dumping its inventory of toxic securities on customers while simultaneously providing a vehicle for Goldman to profit from the decline in value of such securities,” the complaint says.

Among the allegations levelled at Goldman are that it said that the assets that made up Timberwolf were picked by an independent third party, when in reality Goldman “exercised substantial influence and control over every asset to be included in Timberwolf”.

A string of emails and conversations, referred to in the court documents, show the hedge fund seeking emergency briefings with Goldman executives over the investment.

The move to sue Goldman Sachs in the US comes just days after the Grand Court in the Cayman Islands approved a change in control of the Master Fund from liquidators Grant Thornton to the fund’s major shareholder, the Basis Yield Alpha Fund.

The directors of this fund are Australian-based Peter Dobson and Japan-based Tom Carrick. Neither wished to comment yesterday.

Goldman Sachs executives in Australia were surprised at the emergence of the Basis lawsuit. It is understood that negotiations on the possibility of a settlement had been under way for some months.

A senior investment banking figure noted that it had fallen to a small Australian outfit to blow the whistle on the bank and launch the first legal action.

“I think it will be interesting to watch and see whether this creates a wave of similar actions,” he said.

ADDITIONAL REPORTING: REBECCA URBAN

Mapley urges Goldman action

THE man who blew the whistle on Wall Street banking giant Goldman Sachs has urged Australia's corporate watchdog to follow the lead of the US Securities and Exchange Commission in suing the investment bank for fraud.

David Mapley, a former non-executive director of the local Basis Yield Alpha Fund, said the Australian Securities & Investments Commission should closely examine the role of the investment bank’s local arm, Goldman Sachs JBWere, in marketing a mortgage-related investment product that ultimately led to the fund’s demise in August 2007.

“I don’t know if the regulator in Australia is looking at this trade but they certainly should,” the British-born fund manager told The Australian from his base in Switzerland yesterday.

“Goldman Sachs JBWere was a part of the selling process and there were a lot of Australian investors who were caught.

“ASIC should be encouraged to look into this trade.”

Mr Mapley, who has been outed as an informant to the SEC’s landmark case against Goldman Sachs, was referring to the fund’s purchase of a collateralised debt obligation called Timberwolf, which collapsed in value due to the housing crisis.

That prompted Sydney-based Basis Capital to tip the fund, which had invested about $100 million in the issue, into liquidation.

The SEC has since filed civil securities fraud charges against the US firm and a trader in its mortgage group.

Both have denied any wrongdoing and are fighting the lawsuit.

Mr Mapley has worked in financial markets in Hong Kong, London, Tokyo and Sydney, where he had a stint with Macquarie Bank in the mid-1990s.

He confirmed that he had approached the SEC with his concerns shortly after the decision was made to place the fund in liquidation.

A meeting between Mr Mapley and about a dozen SEC investigators was held in March 2008, at which the investigators revealed that they were already working on a case related to Timberwolf.

The product, according to evidence from a senate hearing in the US, was at one stage described as “one shitty deal” by a Goldman Sachs executive.

“Myself and a colleague examined the trade and we had a strong belief that that the security was fraudulently concocted and then sold to us,” Mr Mapley said.

“The SEC was very much interested. I’d be very happy to assist them further if requested.

“They did request further assistance and information from the liquidator. I don’t know what has happened since.”

The liquidator, Grant Thornton’s Paul Billingham, declined to comment on any aspects of the wind-up.

Basis Capital’s Steven Howell and Stuart Fowler did not return phone calls yesterday. The firm, unlike the Basis Yield Alpha Fund, is still operating.

ASIC and Goldman Sachs JBWere declined to comment.

Mr Mapley, chairman of Cayman Islands-based financial consultancy Shimoda Group, which provides funds advisory, management and corporate services, as well as directors to investment funds, said his actions were motivated by preserving what value he could for investors in the collapsed fund.

He and another non-executive director, US-based Zahid Ullah, stood down from the board last year, following disagreements with liquidators on the best course of action.

“As independent directors we expected the liquidators to pursue legal remedies in a timely fashion,” Mr Mapley said, adding there was a good case for legal action to recover some of investors’ funds.

Goldman clients may sue for $15m

GOLDMAN Sachs in Australia faces a potential $15 million lawsuit by former clients who have claimed the investment bank misrepresented complicated derivatives contracts that forced them to buy bluechip stocks at over-the-market odds.

Law firm Slater & Gordon said yesterday it was investigating allegations of misleading and deceptive conduct against Goldman Sachs JBWere Capital Markets.

The investigation surrounds the Goldman Sachs-designed “buy below the market” options contract sold to the bank’s wholesale clients in 2007.

Slater & Gordon’s practice group leader, Van Moulis, said clients had approached the law firm and claimed they were sold the contracts as a protection against a sudden downturn in the equities market.

It was claimed the product was marketed as similar to an “American call option”, but Mr Moulis said it was a rolling futures contract. Attempts at mediation with Goldman Sachs had been unsuccessful.

“It’s a derivative-based product that was marketed and described by the bank as an option,” Mr Moulis said.

“But when you read the fine print it’s a futures contract which locks the client into buying the underlying stock at a certain strike price.

“When the market plunged, the clients were told they were obliged to buy the stock at the higher strike price.

“This particular product was marketed widely across the Goldman Sachs client base.

“It was a home-grown product.”

The potential Slater & Gordon case, which has not yet been filed in court, follows similar action against Goldman Sachs that has been taken by the former chief executive of Merrill Lynch in Australia, Greg Bundy.

Goldman Sachs in Australia refused to comment.

Warren Buffett defends Goldman Sachs

IF senators had invited Warren Buffett to their hearing on Goldman Sachs last week, the event might not have dragged on for 11 agonising hours.

The first question that the renowned investor who runs Berkshire Hathaway was asked by shareholders at its huge annual meeting on the weekend was about Berkshire’s $US5 billion ($5.4bn) investment in Goldman, the bank whose alleged misdeeds contrast so sharply with Mr Buffett’s reputation as a stickler for ethics.

Given the harm to Goldman’s standing from recent revelations about its actions in the housing boom and bust, which were unsavoury if not illegal, what did Mr Buffett think of the Securities and Exchange Commission’s fraud case against the bank?

In his answer, Mr Buffett summed up in a few minutes what was troubling about the SEC’s charges — something that the bank’s boss Lloyd Blankfein and six other Goldman executives, past and present, tried but failed to do in hours in front of the furious senators.

“If you have to care who’s on the other side of a trade, you shouldn’t be in the business of insuring bonds,” Mr Buffett said.

This gets straight to the heart of it.

The SEC accused Goldman of tricking the investors ACA Capital Management and IKB into insuring $US1bn of sub-prime mortgage securities by failing to tell them that Paulson, a hedge fund manager, was effectively buying the insurance against the securities’ default because it had a bearish view of the US housing market.

The SEC claimed that Goldman instead let ACA believe that Paulson intended to join the investors in betting on the securities’ success.

What the regulator has not so far explained is why the investors’ alleged lack of information on Paulson’s intentions abrogated ACA and, to a lesser extent, IKB of responsibility to do their own due diligence on the securities, which were worthless less than a year after the deal was done.

Mr Buffett dealt quickly with that issue, saying: “It looks like they just made a dumb insurance decision.”

The Sage of Omaha might also have put senators at ease over Goldman’s decision to take a short position on the US mortgage market in 2007 while still selling mortgage products to customers.

The senators were incredulous that market-makers did not owe their clients, all big companies and investors, rather than individuals, a fiduciary duty to give them its opinion on investments.

Mr Buffett said that having dealt with Goldman since 1967, when he issued his first bond to raise $US5.5million — the bank agreed to underwrite it but was so embarrassed to be linked with such a small deal that it asked for its name to be kept off the paperwork — he was fine with the status quo.

“They don’t owe us a divulgence of their position any more than we own them an explanation of our reasoning,” he said.

The preference shares that Berkshire received from Goldman in September 2008 in return for a much-needed $US5bn loan pay a 10 per cent annual return.

“That’s $US15 per second,” Mr Buffett said. “Tick. Tick. Tick. I don’t want those ticks to stop.”

Charlie Munger, Berkshire’s vice-president, was less forgiving of Goldman’s actions.

“I don’t think there’s an investment bank of any consequence that didn’t take on too many scuzzy customers or make too many scuzzy products,” he said. But he also said that the SEC should not have charged Goldman over its deal with ACA and Paulson.

Buffett to preach on Goldman’s woes

SOON after the Securities and Exchange Commission sued Goldman Sachs alleging fraud, Goldman chief executive Lloyd Blankfein asked Warren Buffett for tips on how to handle the explosive situation, according to people familiar with the matter.

Mr Buffett, whose Berkshire Hathaway invested $US5 billion ($5.4bn) in Goldman at the height of the financial crisis, told Mr Blankfein he would let him know if he came up with any good ideas.

Berkshire shareholders heading to Omaha, Nebraska, this weekend may soon get a view into Mr Buffett’s thinking. “I expect to get multiple questions about Goldman and I’ll give extensive and complete replies,” he said in an interview today.

Charlie Munger, Mr Buffett’s longtime business partner at Berkshire’s helm who shares the stage with him at the meeting, will likely have some choice words for Wall Street.

While Mr Munger thinks Goldman did nothing illegal, the firm was engaged in “socially undesirable” activities, he said in an interview after the SEC lawsuit was filed.

“They were very competitive in maximising profits in a competitive industry that was permitted to operate like a gambling casino,” Mr Munger said. “The whole damn industry lost its moral moorings.”

He added that he believes Goldman is “more prudent and ethical” than other big Wall Street banks.

Goldman didn’t comment. Today, The Wall Street Journal reported that the US Attorney’s Office in Manhattan is conducting a criminal probe into the bank’s mortgage-trading activities.

The SEC suit alleges that Goldman defrauded investors when it created a mortgage investment with the help of a bearish hedge fund and failed to disclose the fund’s role and position. The bank has denied wrongdoing.

The suit is potentially of special concern to Mr Buffett, known for his ethical standards. Ever since he was a small-town money manager in Omaha, where he has lived most of his life, he has lambasted the aggressive, self-serving tactics of Wall Street’s banking elite.

It was Mr Buffett’s reputation and leadership that helped save another Wall Street investment bank, Salomon Brothers, from the brink of collapse when it was embroiled in a bid-rigging scandal involving Treasury bonds.

Mr Buffett seized the reins at Salomon in 1991 and steered it through the crisis (it was bought by Citigroup). In testimony before Congress on the events then, Mr Buffett said he wanted Salomon employees “to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper”.

When Berkshire’s Goldman deal was announced in September 2008, Mr Buffett indicated that his investment was based in part on his belief in the quality of Goldman’s senior management, including Mr Blankfein. Several top managers, including Mr Blankfein, were grilled by Congress this week regarding the SEC lawsuit and, more broadly, the firm’s loyalty to clients.

Speaking of Mr Blankfein today, Mr Buffett said: “I first met him some years before our investment and have gotten to know him well. I was obviously impressed with him.” He added that he has known every head of Goldman since Gus Levy led the firm more than three decades ago.

Mr Buffett continues to earn huge profits from his Goldman investment, which pours more than $US900 a minute into Berkshire’s coffers, or $US500 million a year. “If he could do (the Goldman investment) again he’d do it in a heartbeat,” said Glenn Tongue, a partner with T2 Partners, a New York hedge fund that owns Berkshire shares.

Another issue that could emerge at the meeting: Mr Buffett’s views on financial regulation now in motion on Capitol Hill. Mr Buffett himself has been drawn into the clash as his hometown senator, Democrat Ben Nelson, has broken ranks with his party, partly to oppose a provision Berkshire also has fought.

The proposal, which concerns derivative contracts, or complex financial contracts tied to underlying assets, could force Berkshire to set aside billions in collateral for a number of contracts the firm has written in recent years. Other companies also could find themselves on the hook to post more collateral.

Berkshire executive David Sokol met with politicians on Capitol Hill to try to get the provision struck from the bill. Mr Buffett has made a number of campaign contributions to Mr Nelson and the men are longtime friends.

In a statement earlier this week, Mr Nelson said he objects to the amendment because he feels it is wrong for any company. The provision “may affect several hundred major American businesses, including Nebraska’s own Berkshire Hathaway, and other Nebraska businesses as well,” the statement said.

Despite such issues, investors heading to Omaha say they expect a return to the upbeat atmosphere of previous years. The 2009 meeting was a relatively subdued affair as investors grappled with a crippling recession.

But in the past year, Mr Buffett made the biggest deal of his career, the $US26bn purchase of what Berkshire didn’t own of railroad giant Burlington Northern Santa Fe Corp.

In February, Berkshire became a component of the S&P 500 index, a result of a stock split carried out for the Burlington purchase. The split made owning Berkshire stock a possibility for many smaller investors who earlier might not have been able to purchase a single share.

Last year saw Berkshire’s book value rise 20 per cent, and its stock is up about 25 per cent since the 2009 annual meeting, versus nearly 40 per cent for the broader market in that period.

A wave of new blood from investors holding post-split B shares could bolster the mood.

“For the new investors who’ve never experience the frank and pragmatic discussion that Munger and Buffett will offer, they’ll be delighted,” said Tom Russo, a partner with Gardner Russo & Gardner, a $US3bn asset manager that holds Berkshire stock.