Goldman Sachs Posts Profit After Being Charged With Fraud

MICHEL MARTIN, host:

I'm Michel Martin and this is TELL ME MORE from NPR News.

Just ahead, we will remember Dorothy Height, a leader for civil rights, women's rights and human rights for more than seven decades. She died today at the age of 98.

But first, it's a good news, bad news day for the Wall Street firm Goldman Sachs. Good news because it recorded close to $3.5 billion in earnings for the first quarter of 2010. That beats market expectations. The bad news is that the Securities and Exchange Commission is still pursuing fraud charges against Goldman. The agency filed a civil lawsuit on Friday accusing the firm of misleading investors in a mortgage investment that was designed to fail.

To hear more about Goldman Sachs and to put all of this into context for us, we've called Jacob Goldstein. He's a blogger and correspondent with NPR's Planet Money team. He's with us from New York. Welcome, Jacob, thanks for joining us.

JACOB GOLDSTEIN: Thanks for having me.

MARTIN: Just give us a little primer of the news today, $3.5 billion in earnings sounds like a nice chunk of change. How was Goldman able to accomplish that?

GOLDSTEIN: They did very well in their trading business, basically trading bonds, trading stocks, a lot of that sort of thing. We've been seeing a lot of that from the banks who've been reporting their first quarter earnings. And, of course, you know, their earnings are being compared to a year ago, the first quarter of 2009, when things were really very, very dire in the financial system. So, lots of them are doing much better in the first quarter of this year than they did in the first quarter of last year. And that's certainly true for Goldman.

MARTIN: Looking at the pending suit, what exactly has the SEC accused Goldman of doing?

GOLDSTEIN: What the SEC says is there was this hedge fund called Paulson and Company, run by a guy named John Paulson, and they thought back when the housing boom was still booming that house prices were going to fail. So they went to Goldman - Paulson and Company went to Goldman and said, we want to set up an investment where we'll make money if the housing market loses value.

Goldman wanted to work with them on that but they realized, this is according to the SEC, Goldman realized that, you know, if they tried to sell this thing that way, nobody would want to buy it. So, Goldman went to a third party, to a company called ACA. And what this company, called ACA, was in the business of doing was putting together these mortgage investments.

So, Goldman introduces Paulson to ACA, according to the SEC. The ACA puts together this package with the influence from Paulson and then Goldman sells this mortgage investment. But according to the SEC, Goldman doesn't tell the people who buy the investment that Paulson, which wanted to bet against it, had a lot of influence over what went into it.

MARTIN: What exactly is it that they did wrong? Because it is not I don't know if Id say it's common, but there are investment vehicles that do hinge upon something going wrong. So, what exactly was it that the SEC says Goldman did that fraudulent? Was it misleading people about who was behind this investment vehicle? Was it misleading people about what was in this investment vehicle? Or was it not telling people what the real purpose of the vehicle was?

GOLDSTEIN: It was really the first of the things you said, it was misleading investors about who was behind this investment vehicle. But you do make a good point, and Goldman is aggressively defending itself. They are saying, we didn't do anything wrong. And they're saying, in fact, in this kind of mortgage investment that is at the center of this case, you have to have someone betting against it and someone betting on it. So, everybody who buys one of these things knows that there's somebody out there in the world who is betting against it.

MARTIN: Goldman is saying and has said in the press release that they are going to vigorously contest these charges. They say the SEC's charges are completely unfounded in law and fact, and we will vigorously contest them and defend the firm and its reputation, but how? Are they saying what the line of their defense is? Is that it's okay to have investment vehicles like this and that they didn't mislead anybody?

GOLDSTEIN: Yes, that is essentially what they say. I mean, there are a few key points they make in their defense. One is this company, ACA, that they brought in to be responsible for putting this thing together, that company, ACA, had the responsibility for choosing, ultimately choosing what went into this investment vehicle. So, yeah, sure, Paulson could say, well, we think you should put this or we think you should put that. But ultimately, it's ACA's decision what goes in there. So they're the ones who make the final decision, whatever Paulson said or didn't say.

MARTIN: Is the SEC alleging that any particular group was harmed by this particular instrument? Or are they saying that the system overall of confidence in the financial markets was harmed because they weren't as transparent as they should've been?

GOLDSTEIN: The SEC is alleging that the people who bet that this thing was going to go up were harmed. Those people actually lost about a billion dollars and Paulson made about a billion dollars. So, basically, the key notion here is that Goldman misrepresented to investors what was behind this investment vehicle. And the investors who bought the vehicle lost money, and they might not have bought it, according to the SEC, if Goldman had said everything they were supposed to say about it.

MARTIN: Jacob, was there any scuttlebutt about how successful people on Wall Street thinks this lawsuit is likely to be? I mean, obviously, lots of different people have a stake in this argument. But I just wonder if there's any scuttlebutt about how strong a case people up there think the SEC has.

GOLDSTEIN: It's pretty contentious. You know, there was an interesting report in the news this morning that the SEC itself had a split vote over whether to go ahead with this case. And as it happened, the people in the SEC, the leaders of the SEC who are Republicans voted against it, and those who were Democrats voted for it. So it's already very politicized. Obviously it's being politicized in Washington.

I mean, interestingly, as a legal case, you know, it turns on this narrow notion of what Goldman had a responsibility to tell investors or not to tell investors. So it's interesting to me that it has these sort of broad symbolic and political ramifications. And legally it turns on this very narrow question.

MARTIN: Jacob Goldstein is a blogger and correspondent with NPR's Planet Money team. He joined us from bureau in New York. Jacob, thank you.

GOLDSTEIN: Thank you for having me.

MARTIN: To find out more about Goldman Sachs, just go to our website, NPR.org and check out more stories from Planet Money.

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