Goldman May Face U.K., German Inquiries After Suit (Update1)

By Michael Patterson and Tony Czuczka
April 19 (Bloomberg) -- Goldman Sachs Group Inc. faces a regulatory probe in Britain and scrutiny from the German government after the U.S. Securities and Exchange Commission sued the firm for fraud tied to collateralized debt obligations.
Prime Minister Gordon Brown called yesterday for the Financial Services Authority to start an inquiry, saying he was "shocked" at the "moral bankruptcy" indicated in the suit.
Germany’s financial regulator, Bafin, asked the SEC for details on the suit, a spokesman for Chancellor Angela Merkel said.
Politicians that were forced to bail out their banks during the financial crisis are turning on Goldman, which critics say helped cause the turmoil and profited from it. The European Union is also probing Goldman’s role in arranging swaps for Greece that may have masked the country’s budget deficit.
"We will see politicians throughout the world piling on Goldman Sachs," said Scott Moeller, a former investment banker now teaching at Cass Business School in London. "Now they have vulnerability. Everyone and anyone, especially politicians, are going to be trying to make hay with this one."
The SEC said that in early 2007, as the U.S. housing market teetered, Goldman Sachs created and sold a CDO linked to subprime mortgages without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against the vehicle, known as Abacus 2007-AC1.

‘People Were Misled’

The firm denies any wrongdoing. Fiona Laffan, a spokeswoman for Goldman Sachs, and Heidi Ashley, a spokeswoman for the FSA, declined to comment.
"It looks as if people were misled about what happened,"
Brown, who faces a national election on May 6, said on the BBC’s Andrew Marr program yesterday. "The banks are still an issue. They are a risk to the economy.’
Royal Bank of Scotland Group Plc paid $841 million to Goldman Sachs to unwind its position in Abacus, which it inherited when it bought parts of ABN Amro in 2007, according to the SEC. The Edinburgh-based lender is now controlled by the British government after receiving a 45.5 billion-pound ($70
billion) taxpayer rescue, the world’s biggest banking bailout.
The SEC said Goldman Sachs misled investor IKB Deutsche Industriebank AG about Paulson’s role in the trade. Dusseldorf- based IKB lost about $150 million in the Abacus CDO, most of which went to Paulson, which reaped a $1 billion profit in total from betting against the vehicle, according to the SEC.

Legal Steps

IKB became Germany’s first casualty of the U.S. subprime- mortgage crisis in 2007 after its investments in asset-backed securities soured. KfW, Germany’s state-owned development bank, pumped almost 10 billion euros ($13.5 billion) into IKB in 2008 to shore up the country’s banking system.
The German government ‘‘will ask the SEC for information,"
said Ulrich Wilhelm, a spokesman for Merkel. "Then we will look at the records and consider possible legal steps."
Goldman Sachs said in a statement it had provided "extensive disclosure" to IKB about the risk of the underlying mortgage securities. Paulson, which hasn’t been charged with any wrongdoing, said in a statement that it didn’t "sponsor or initiate" Goldman’s Abacus program. The fund said that while it did purchase credit protection from Goldman on some Abacus securities, it wasn’t involved in the marketing.

‘Profound and Thorough’

The EU is investigating Goldman Sachs over swaps it arranged for Greece in 2002. The country entered a cross- currency swap with Goldman Sachs on about $10 billion of debt issued in dollars and yen. That was swapped into euros using a historical exchange rate, a mechanism that generated about $1 billion in an up-front payment from Goldman to Greece. Goldman has said it did nothing wrong.
The probe will be "profound and thorough," EU Monetary Affairs Commissioner Olli Rehn said at a press conference in Madrid on April 17.
Kim Soo Mi, a spokeswoman for South Korea’s Financial Supervisory Service, said the regulator "is monitoring market developments overseas as well as in South Korea, and we plan to review the status of South Korean financial institutions’
exposure to that CDO product of Goldman Sachs."
The New York-based firm is already under attack for its role as a trading partner to American International Group Inc., the insurer bailed out by the U.S. government. Goldman Sachs said April 7 that AIG’s bailout in 2008 helped the bank and every other financial firm because the insurer’s collapse would have been "extremely" disruptive to financial markets.
The $182.3 billion bailout ensured that Goldman Sachs and other counterparties were repaid in full. Much of the $12.9 billion Goldman Sachs received from AIG’s rescue was paid out to meet AIG-linked "obligations," the firm said.