The US Securities and Exchange Commission has accused the biggest and most influential US securities firm of hiding from investors the fact that a prominent hedge fund manager helped create a subprime mortgage product and was betting against it.
US President Barack Obama prepared to fly to New York later in the week to press what would be the most sweeping crackdown on the financial industry since the Great Depression, and European regulators said the Goldman case could bolster their efforts to regulate derivatives.
Frenchman Fabrice Tourre, the self-described "fabulous Fab" who is the only Goldman staffer named in the US Securities & Exchange Commission civil lawsuit, remains a Goldman employee, a spokeswoman for the bank said. The 31-year-old has made a "personal decision to take a bit of time off," she said.
The SEC complaint, lodged on Friday, included emails in which Tourre - now based in London - appeared to exult in the products he was creating.
"Only potential survivor, the fabulous Fab standing in the middle of all these complex, highly leveraged, exotic trades he created...," he wrote in one.
Goldman shares were higher in afternoon trade on Monday after their biggest drop since the financial crisis on Friday. Investors struggled to assess how big a hit Goldman and the rest of the financial industry would take from the fraud suit.
"If nothing else, higher regulatory scrutiny could lead to a more cautious work force at Goldman and curtail future revenue generation if it persists," analysts at FBR Research said in a research note. The firm removed Goldman from its "top picks" list but reiterated its "outperform" rating, citing "strong fundamentals." The fraud suit has cast a shadow over what had been expected to be a blockbuster earnings report from Goldman on Tuesday. The 141-year-old bank said its co-general counsel, Greg Palm, would join its earnings call alongside Chief Financial Officer David Viniar.
The SEC has said investors were kept in the dark about the fact that Paulson was shorting the synthetic collateralized debt obligation he helped Goldman put together. One of those investors, German bank IKB, said it was reviewing all of its financial transactions in the run-up to the crisis. The bank said it might consider taking legal steps but had no grounds for action so far.
The Dusseldorf-based bank nearly collapsed in 2007 and lost almost all of the $150 million it put into the Goldman CDO.
Deutsche Bank and UBS led a 2 percent slide by European bank shares on Monday as investors feared regulators would probe deeper into past deals throughout the industry.
Britain and Germany said they could also pursue Goldman. The UK financial regulator said it was looking at the circumstances of the SEC's charges, as was Germany's BaFin, which said it was considering possible damage claims.
"All this suggests you should not buy into a sector where the regulators are about to move the goal posts," said Bruce Packard, an analyst at Seymour Pierce in London.
"Even if they don't, the pitch surface is so uneven that if the goal posts aren't moved, unfortunately we might see a few more broken legs in future." The prospect of a wider probe unsettled investors across the sector.
Citigroup Chief Financial Officer John Gerspach said during his bank's earnings call that the bank is being probed by the SEC as part of an industrywide investigation into subprime and other issues. He said the bank had no involvement with the Goldman case.
In the United States, Democrats tried to use the Goldman allegations to their advantage as they press for congressional approval of the most sweeping package of financial regulatory reforms since the Great Depression.
Senator Christopher Dodd said he was hopeful that agreement would be reached on a bill and claimed that his proposal would have stopped the type of activity alleged in the SEC's suit against Goldman.
EU market regulation chief Michel Barnier said that if Goldman was found to have committed fraud, it would reinforce the need for Europe to act to regulate derivatives.
Goldman shares were up $1.30, or 0.8 percent, to $162.00 in afternoon trading on the New York Stock Exchange.
"The fact that the stock was down more than 12 percent on Friday seemed to be a very big move. Today people are stepping back and reevaluating that," said Giri CherukurI, head trader at OakBrook Investments LLC, in Lisle, Illinois.
The overall US market was little changed. Some investors said anxiety about the Goldman probe was continuing to take a toll.
Investors, ranging from banks to pension funds and local governments, lost billions of dollars on complex structured products like the one at the heart of the SEC case against Goldman, and many are considering legal action.
