Goldman-Paulson deal was rejected

THE Securities and Exchange Commission in recent weeks has questioned executives of a little-known firm that played a key role in the business of arranging mortgage investments, as part of the agency's probe into now-controversial deals struck at the height of the housing bubble.

GSC Group was one of several firms that helped banks including Goldman Sachs Group put together deals that allowed investors to bet on the housing market.

The New Jersey investment firm turned down Goldman’s request to select assets for the debt deal at the centre of the agency’s fraud lawsuit against Goldman, according to a person familiar with the matter and an email released by a senate sub-committee this week. The concern: The deal was too risky for investors, according to the person and the email.

GSC received a subpoena from the SEC last summer and held subsequent discussions with the agency, including in recent weeks, according to an executive at the firm.

“GSC’s involvement here is strictly as a witness, and we’re cooperating with the SEC,” said Daniel Ross, a lawyer for the firm.

A spokesman for the SEC declined to comment. Goldman and an employee on the deal who also was sued, Fabrice Tourre, have denied wrongdoing.

GSC was founded in 1994 as Greenwich Street Capital Partners, a private-equity unit of Travelers Group. In 1999, it became an independent company and now goes by GSC.

GSC, which manages about $US8 billion ($8.7bn), counts among its senior investment professionals five Goldman alumni, including GSC’s chief executive and chairman, Fred Eckert. Goldman regularly offered GSC a chance to work on its debt deals earlier this decade, according to someone close to the matter.

A representative of GSC said executives who ran the firm’s mortgage unit didn’t come from Goldman and the unit didn’t have a special relationship with the bank.

A Goldman spokesman said the firm had no comment.

In January 2007, Goldman bankers approached GSC to select mortgage-backed securities for a complex deal known as a synthetic collateralised debt obligation that it was creating at the behest of hedge-fund manager John Paulson.

At the time, Mr Paulson was bearish on the mortgage market, according to an email released this week by the senate sub-committee questioning Goldman executives and according to the SEC complaint. GSC turned away the business.

“As you know, a couple of weeks ago we had approached GSC to ask them to act as portfolio selection agent for that Paulson-sponsored trade, and GSC had declined given their negative views on most of the credits that Paulson had selected,” said the email, from Mr Tourre in late-January 2007.

Goldman eventually tapped ACA Management to select the securities for the deal, which was named Abacus 2007-AC1.

The SEC alleges Goldman and Mr Tourre didn’t inform investors that Mr. Paulson’s firm, Paulson & Co, played a role in picking the assets and that Goldman and Mr Tourre misled ACA about Paulson’s position.

The deal quickly lost value, leading to investor losses in excess of $US1bn and gains to Paulson of about the same amount.

GSC worked with Goldman on a $US1.6bn mortgage-linked deal called GSC ABS Funding 2006-3g that closed in January 2007.

GSC also was involved in Anderson Mezzanine Funding 2007-1, a $US307.5 million mortgage-linked CDO underwritten by Goldman in March 2007 that soured quickly after it was sold, according to documents released by the sub-committee.

GSC agreed to manage the collateral of several mortgage-linked CDOs that hedge fund Magnetar Capital had input on from 2006 to 2007, according to documents reviewed by The Wall Street Journal and people familiar with the matter.

Magnetar purchased a risky “equity” slice of these and other CDOs overseen by third-party managers and bought credit default swaps on other parts of the same CDOs or similar deals that would help Magnetar profit in a housing downturn.

Those deals also tumbled in value.

A spokesman for Magnetar declined to comment.

GSC stopped helping create new mortgage CDOs two years ago amid a downturn in the market, according to the firm.

Under-fire Goldman posts $3.7bn profit

GOLDMAN Sachs Group may be facing complications from the political and legal storm over its business practices, but the Wall Street bank's first-quarter financial results continued a pattern of trouncing even optimistic expectations.

Goldman, the subject of civil-fraud charges that the government brought Friday that rocked the bank and Wall Street, reported that its profit in the first quarter soared 91 per cent from a year earlier to $US3.46 billion ($3.7bn).

The results, driven by strong trading and bond underwriting, helped deliver a much-needed boost amid the controversy swirling around the firm since last week.

Lloyd C. Blankfein, Goldman’s chairman and chief executive, alluded to the Securities and Exchange Commission’s complaint only once in the company’s earnings release.

“In light of recent events involving the firm, we appreciate the support of our clients and shareholders, and the dedication and commitment of our people,” he said in a statement.

Goldman’s staff was paid well for its support. Compensation rose 17 per cent to $US5.5bn from $US4.7bn a year earlier.

Still, compensation declined as a percentage of the company’s net revenue, to 43 per cent from 50 per cent.

Goldman reported a profit of $US3.46bn, or $US5.59 a share, up from $US1.81bn, or $US3.39 a share. Revenue jumped 36 per cent to $US12.78bn.

The most recent consensus forecast of analysts polled by Thomson Reuters was that the New York investment bank would report earnings of $US4.01 a share on $US11.07bn in revenue.

Despite the strong results, Goldman shares were down about 1 per cent in midday trading yesterday. The stock fell nearly 13 per cent Friday after the SEC filed its complaint.

Goldman has posted impressive results recently as it has pulled ahead of rivals that are struggling to overcome the credit crisis. But a cloud has developed in the past few days as the SEC accused the company and one of its executives of defrauding investors by peddling a mortgage-related financial product it knew was doomed to fail as the housing market collapsed. Goldman maintains it did nothing wrong and is fighting the charges.

In a conference call that lasted more than an hour, most of analysts’ questions dealt with the legal entanglements facing the company.

Goldman’s co-general counsel, Greg Palm, said during a conference call that the investment bank wouldn’t intentionally mislead clients and would “be the first” to condemn any employees that went against that credo.

Mr Palm said “our responsibilities as a financial intermediary require it, and our commitment to integrity and the firm’s business principles demand it”. He added that the case is heading toward a trial at this point, but that there is certainly the possibility that Goldman could settle if both sides come into agreement.

In the SEC complaint, Goldman executive Fabrice Tourre was accused of defrauding investors by peddling a financial product the investment bank knew was doomed to fail. Mr Tourre is currently out on indefinite leave; he hasn’t been suspended by Goldman.

The company’s total trading and principal investments, which accounted for most of its revenue, rose 43 per cent in the quarter to $US10.25bn. Fixed income, currency and commodities revenue, which is part of total trading and principal investments, rose 13 per cent.

Investment-banking revenue increased 44 per cent, though it dropped 28 per cent sequentially.

Mr Palm raised Goldman’s estimate of losses on the transaction being investigated by the government to upward of $US100 million from the previous estimate of about $US90m.

“We don’t know how this case is going to unfold at this point. It’s very early on,” he said.

Merrill poaches Goldman’s Fletcher

BANK of America-Merrill Lynch's Australian head of equities, Matt Unsworth, has continued to build up the investment bank's equities team with the hiring of Goldman Sachs JBWere's Sam Fletcher.

The poaching of Fletcher, who will work in the newly created role of cash distribution within the team, follows the hiring of Bell Potter’s three-man real estate team last week.

Fletcher resigned from GSJBW yesterday and will start at Merrill in May.

Unsworth has been building up Merrill’s local equities team with about 40 hirings since April 2009, including the recent addition of fellow GSJBW banker Peter Phillips. The bank was now focused on boosting its client-handling, said Unsworth, after initially focusing on building up its research and sales areas.

Merrill last month stunned investment banking circles when it poached Royal Bank of Scotland co-head of markets Chris Thomas and nine other bankers in a morning raid on the bank.

It was the second raid on its rivals in six months – Merrill raided UBS’s property team, which reportedly cost nearly $27 million in guaranteed salaries for nine bankers.

bennetm@theaustralian.com.au

Goldman’s high-flyers feel the pinch

THE 100 most senior employees at Goldman Sachs in London will have their total pay capped at pound stg. 1 million ($1.78m) when the Wall Street bank reveals its 2009 bonuses this week, in a nod to the government's calls for cutbacks in bankers' pay.

Less senior British employees who are awarded more than pound stg. 1m for their work last year will have 60 per cent of any amount over pound stg. 1m paid in deferred stock, in line with Financial Services Authority guidelines.

Goldman Sachs’s 32,500 workers worldwide will share the burden of Britain’s one-off 50 per cent tax on bonuses above pound stg. 25,000, which is likely to reduce the bank’s compensation pool by hundreds of millions of dollars.

Analysts estimated that the tax sliced about pound stg. 300m from the pay pool of JPMorgan, a rival bank, which was pound stg. 9.3 billion for 2009.

Wall Street’s most successful bank, which employs about 5500 people in London, said last Thursday that it had set aside $US16.2bn ($17.9bn) for bonuses for 2009, well below the $US20.2bn record pay pool of 2007.

Announcing a $US13.4bn net profit for last year on net revenues of $US45bn, only 2 per cent lower than 2007, David Viniar, Goldman Sachs’s finance director, said the bank had shown “restraint” in awarding pay. “We’re not blind to the pain and suffering still going on around the world and we’re not deaf to the calls for restraint. We heard them,” he said.

Goldman Sachs’s partners will wear a disproportionate amount of the cuts to the reduced pay pool, in the same way that they are paid the most generously in bumper years.

There are about 100 partners in London, all of whom will be paid no more than $US1m for last year. All Goldman Sachs partners around the world will receive 60 per cent of their bonuses in stock that will vest over the next three years but cannot be sold for five years.

Goldman Sachs had already said that its 30-member management committee would receive their entire 2009 bonuses in stock.

The partners’ compensation shrank in the fourth quarter when the bank allocated $US519m out of its pay pool to Goldman Sachs Gives, its charity. Of the $US519m, $US500m was cash that had been allocated for partners’ pay.

Goldman Sachs and other banks also face a US tax designed to raise as much as $US117bn to cover the cost of the Obama administration’s bailout.

Goldman Sachs defends 46pc pay rise

WORKERS at Goldman Sachs have racked up an average $US527,192 ($572,801) in salary and bonuses so far this year after the US investment bank made a $US3.1 billion profit in the third quarter.

Bonus defence: Goldman Sachs’ headquarters in New York. Picture: AP

Goldman chief calls for pay changes

THE chairman of Wall Street firm Goldman Sachs, Lloyd Blankfein, said that the anger over bank compensation programs and bonuses was “understandable and appropriate” and that multi-year guaranteed employment contracts “should be banned entirely”.

Lloyd Blankfein in Frankfurst yesterday Picture: Bloomberg

Goldman secret trade code stolen: FBI

A FORMER Goldman Sachs employee has been charged with stealing computer codes related to the firm’s high-speed trading platform.

Sergey Aleynikov, a naturalised US citizen who emigrated from Russia, allegedly unlawfully copied, duplicated, downloaded and transferred computer codes from a New York-based financial institution and uploaded the codes to a computer server in Germany, according to a complaint filed by federal prosecutors.

The complaint from the government didn’t specifically reference Goldman Sachs. Goldman Sachs was referenced during Saturday’s bail hearing, and a person familiar with the matter confirmed that Mr Aleynikov worked as a computer programmer for the company.

The person familiar with the matter also said the theft has had no impact on Goldman Sach’s clients and no impact on its business. The person said the codes involved Goldman Sachs’ proprietary trading, which is its business of trading securities with its own money.

Goldman Sachs has historically relied on proprietary trading for a large share of its revenue. The company does not break out specific profit or revenue for this business. The allegedly stolen codes related to proprietary trading that is done using computers.

Brad Hintz, a former chief financial officer for Lehman Brothers, said any theft of the codes would likely not have any serious impact on how Goldman does business. Whoever got their hands on the code might simply be able to execute a trade a bit faster than the securities firm, he said.

“There’s a lot more to Goldman Sachs than one (proprietary) trading desk, or even all of prop trading,” said Mr Hintz, now an analyst with Sanford Bernstein. “Wall Street’s systems may be the best in the world…this wouldn’t be an end-of-the-world event.”

Shares of Goldman closed up $US2.97, or 2.1 per cent, at $US146.46.

The alleged actions took place between June 1 and Friday, when Mr Aleynikov was arrested as he got off a flight at Newark Liberty International Airport. Mr Aleynikov worked at Goldman as a computer programmer from about May 2007 until about June 5.

Many Wall Street firms have cut back on riskier forms of proprietary trading since the onset of the financial crisis. However, there has been some indication that Goldman and others are ramping up this business again.

Questioned by Federal Bureau of Investigation officials, Mr Aleynikov admitted only to “unwitting conduct,” that whatever he is accused of doing wasn’t done on purpose. Mr Aleynikov’s lawyer, federal defender Sabrina Shroff, said she believed her client was innocent.

According to the complaint, Mr Aleynikov said after his arrest that he “only intended to collect ‘open source’ files on which he had worked, but later realised that he had obtained more files than he intended”.

He also “claimed that he did not distribute any of the proprietary software that he obtained from the financial institution” and had agreed with the new employer not to use unlicensed software.

Mr Aleynikov was granted bail. Bail includes a $US750,000 ($941,000) personal recognisance bond secured by three financially responsible persons and $US75,000 in cash.

He must surrender all travel documents, and travel is restricted to New Jersey and the southern and eastern districts of New York — Manhattan and Long Island.

FBI special agent Michael G. McSwain said in the filing that the computer codes were related to a platform that allowed Goldman Sachs to engage in high-speed and high-volume trades on stock and commodities markets.

The bank considers the code to be proprietary, confidential information and trades made on the platform generate millions of dollars in profits each year for the company.

The filing said Mr Aleynikov was given access to the computer code as part of a team responsible for developing and improving the platform. The company said he was required to sign its confidentiality agreement when he first took a job there.

The filing said at some point before June, Mr Aleynikov told Goldman Sachs he would resign. His salary at the time of his resignation was about $US400,000 a year. The FBI agent said a Goldman representative who spoke to Mr Aleynikov about his resignation said he was leaving to work for a new company that also planned to engage in high-volume automated trading.

Mr Aleynikov previously worked for telecommunications company IDT Corporation, where he worked as a systems architect for routing and internet phone service, according to his page on business networking website Linked-In. He also achieved a masters of science degree in 1996 from Rutgers University.

Additional reporting: Amir Efrati

theaustralian.news.com.au