Not only is Gordon Brown disturbed at the allegations made against Goldman Sachs (GS) by the US Securities and Exchange Commission (SEC), but many lawyers in America are predicting a wave of legal action, possibly a class action, against the bank.
Some US law firms are now hunting for investors who lost money on the now infamous ‘Abacus’ financial products.
What these law firms want to establish is whether this is a single isolated case, or whether it is part of a pattern of investment banks colluding with hedge fund operators to then make money out of investment products they know will, or even help to, underperform.
The Dutch bank Rabobank filed a lawsuit against Merrill Lynch for much the same thing in June 2009. This involved a CDO instrument called ‘Norma’ and a Chicago based hedge fund, Magnetar who deny doing anything wrong.
The 84% publicly owned RBS is said to have lost $841 million in dealings with the Abacus fund and the German bank IKB, also publicly owned, is thought to have lost some $150 million.
The current allegations against GS involve a London based trader Fabrice Tourre. They are accused of misleading investors by creating Abacus, a sub-prime mortgage CDO but not informing them that the Paulson hedge fund would be betting against the CDO. There are also questions as to why the FSA allowed Tourre to operate in the first place.
Whilst GS vigorously defends its position and claims that there is no basis in ‘fact or law’ on these allegations, in the current political climate there is a requirement to get this investigated properly.
The stakes are high, the stock market took a hit on Friday as the news of the SEC investigation was announced and there may well be further falls today. Gordon Brown’s flagship FSA also comes under scrutiny just as the general election campaign gets into full swing with the LibDems having pulled a surprise lead. For GS, should they lose, the punishment could be in the billions of dollars.
But the SEC charges also come at an interesting time. The US senate is expected to debate President Obama’s banking reforms in the next few days. 41 senators last Friday wrote to Senate leader Harry Reid opposing some parts of the reform but the letter did say “We must ensure that Wall Street no longer believes or relies on Main Street to bail them out”. The US Treasury Secretary Timothy Geithner also believes that there is sufficient will in the senate to see the reforms through.