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Goldman Sachs Announces Earnings Amid Scrutiny

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Goldman Sachs Announces Earnings Amid Scrutiny

Business

Goldman Sachs Announces Earnings Amid Scrutiny

Goldman Sachs Announces Earnings Amid Scrutiny

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Wall Street investment giant Goldman Sachs reported Tuesday that its first-quarter earnings almost doubled to $3.3 billion — as its trading business again surpassed the rest of the financial industry. On Friday, the SEC announced civil fraud charges against Goldman over how it packaged and sold one of its subprime mortgage investments.

RENEE MONTAGNE, host:

This is MORNING EDITION from NPR News. I'm Renee Montagne.

STEVE INSKEEP, host:

And I'm Steve Inskeep. Good morning.

Goldman Sachs Group announced this morning that its first-quarter earnings nearly doubled - to more than $3 billion - which exceeds expectations. That was a bit of good news, a very large bit of good news because four days ago, the Securities and Exchange Commission sued Goldman Sachs for fraud.

NPR's Tamara Keith is covering this story. She joins us live. Good morning.

TAMARA KEITH: Good morning.

INSKEEP: OK, where did Goldman make its money?

KEITH: Well, the biggest share of the firm's earnings came from trading what are considered risky assets bonds, corporate debt, mortgages, currency and commodities.

This is, as you said, a very strong earnings report from Goldman that pretty much cements its place as a Wall Street powerhouse. And that also makes the SEC's action stand out, because Goldman is this lightning rod. They're the big moneymaker on Wall Street that everybody loves to hate but pays their employees a lot of money. And so with the SEC going after this firm, it's a big statement.

INSKEEP: And let's remember, this is also a very politically active and politically powerful firm that has sent a lot of people to the government, the Treasury Department, over the years. And yet the SEC filed this lawsuit, the Securities and Exchange Commission filed this lawsuit, essentially saying that they went a little bit too far, maybe a lot too far, in some of its trades. What exactly did Goldman allegedly do?

KEITH: Well, this focuses in on one particular financial instrument, like one single item, known as Abacus 2007 AC-1, which is a synthetic collateralized debt obligation.

INSKEEP: That name you just gave, it's like a brand name. This is what they're selling. Here's your Abacus. Would you like some Abacus, please?

KEITH: Right. And basically, Abacus is a bet. They're saying banks on one side, hedge fund on another side. Here's this pile of mortgage securities. You all are going to bet on which way this thing's going to turn out. The hedge fund, run by Paulson and company, bet that it was going to crash and burn. A couple of banks, and actually Goldman, bet that they were going to make a ton of money.

INSKEEP: But this happens all the time. There's always people that are betting that the market will go up and down, and they're on opposite sides of the same bet. What was wrong with this particular transaction as far as Goldman is concerned?

KEITH: Well, Goldman...

INSKEEP: Or as far as the SEC is concerned.

KEITH: Yeah, Goldman was perfectly happy with the way this turned out. They're always, in these types of transactions, in these synthetic collateralized debt obligations, they're always the middleman between a short and a long, as they call it.

But in this case, the SEC is saying that the guy that the firm that was shorting this, betting that these things would fail, was helping to determine what would be in the CDO, in determining what would be inside Abacus.

INSKEEP: So the allegation here is this man, John Paulson, no relation to the former Treasury secretary...

KEITH: Right.

INSKEEP: ...basically had undue influence over putting together this debt obligation that he was then going to bet against. Is that what this amounts to?

KEITH: What they're saying is that he advised hey, why don't we put some of these things in...

INSKEEP: Bad mortgages, basically.

KEITH: Yeah. And not all of his advice was taken, but the real issue here is that the SEC is saying that the other firms investing, the banks investing in this instrument, needed to know that this guy, Paulson, and his firm were betting against it and deciding what would be part of it.

INSKEEP: OK, this seems a little more complicated than say, the Bernie Madoff scam, where there were just made-up investments. This is a good deal more complex transaction that the SEC is wading into. And of course Goldman responded to it today even as they had this conference call announcing their earnings. What are they saying?

KEITH: Well, they said that they would never intentionally mislead anyone, that the parties involved here were very savvy investors, that the banks had done many deals like this before; they knew that there was someone on the other side betting against it, that's the way it was, and that knowing whether Paulson was involved or not was not really material.

INSKEEP: Is this going to affect the political debate going on at the same time, about greater regulation of the financial industry?

KEITH: Well, it certainly has already been brought up numerous times by folks saying hey, look at this, we need to stop this kind of activity. And some other folks are saying hey, you know, this is pretty convenient that this came out right as this debate was heating up, right as Goldman was about to announce its earnings, and as the SEC has taken a lot of hits for missing things like the Madoff scandal.

INSKEEP: OK. Tamara, thanks very much.

KEITH: Thank you.

INSKEEP: That's NPR's Tamara Keith, reporting this morning as Goldman Sachs responds to an SEC lawsuit and also announces its earnings for the first quarter. In the first quarter of this year, Goldman Sachs says it earned about $3.5 billion.

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