WSJ: Tracking the Fallout on Goldman

Date: 19-Apr-2010

By AARON  LUCCHETTI and RANDALL SMITH

Friday, news of U.S. regulators' fraud lawsuit against Goldman Sachs Group Inc. dominated trading
floors and financial channels.

Saturday, it moved to little-league sidelines, birthday parties and other weekend venues of adult
conversation.

"It's the flavor of the day," said Gustavo Dolfino, senior managing director at executive
recruiting firm Accretive Solutions, on his way to a dinner meeting in London. The Goldman case, he
said, was the No. 1 topic at nearly every meeting he had there this weekend.

The Securities and Exchange Commission on Friday filed civil charges against Goldman, claiming it
deceived clients by selling them mortgage securities designed by a
hedge-fund firm run by John Paulson, without revealing his role in structuring the deals. Mr.
Paulson profited from betting on the housing market's collapse. Goldman has denied the charges. Mr.
Paulson and his company, Paulson & Co., aren't charged.

Some welcomed the government's move or thought it had legs.

"We're starting to peel back a layer of the onion that we hadn't gotten to yet," said Christopher
Whalen, managing director of Institutional Risk Analytics, a research and
risk-management firm. After reviewing the case, Mr. Whalen said it appears the "SEC has been very
cautious."

Catherine Banat, a former Goldman employee in treasury and securities services who now specializes
in compliance issues, said she has felt "shock and disappointment" at the charges. "We all hold
Goldman to a higher standard," she explained.

On the other hand, Ms. Banat said, the case "reassures investors that the SEC is investigating acts to Goldman Sachs Case - WSJ.com and trying to be more vigilant. If it has substance, it would be a big win for the SEC."

The head of a boutique advisory firm, Peter J. Solomon, said "this allegation, even if unproven,
strikes at the heart of the securities industry because participants have to believe they are
dealing with counterparties in good faith."

Others were sympathetic to the investment bank's position, namely that it didn't need to disclose
Paulson & Co.'s role in shaping the securities and it didn't mislead others in the process as to
the hedge-fund firm's bearish position.

"I kind of rushed to judgment," upon first seeing the charges, said David Trone of Macquarie
Securities, who follows banks and broker-dealers. The "claim obviously makes the target look pretty
guilty."

But after Goldman gave a detailed statement Friday afternoon, Mr. Trone said, "it was pretty
convincing as well. It seems like there are two sides of every story.…It's going to be an
incredible battle."

In Greenwich, Conn., Gary Cunningham, chief executive of boutique investment bank Execution Noble
LLC, stared at his computer screen Saturday while glancing at an English Premier League soccer
match on television. He exchanged emails with colleagues about what the Goldman bombshell meant.

His view: investors overreacted to the news. Goldman's stock fell nearly 13% Friday. "To take $13
billion off the market capitalization of Goldman Sachs is overdone," said Mr. Cunningham, who
questions whether the case will succeed. Traders like to exit their positions before a weekend
anyway, he figured.

The case signals a turn toward an even more difficult environment for Wall Street, particularly on
the lightly regulated area of derivatives trading, some said.

The regulators "all have something to prove," said Institutional Risk Analytics' Mr. Whalen. "In
the past they leaned in the industry's direction. Now they are leaning the other way."

"People are thinking about how much of the vigorish will be taken out of the over-the-counter" part
of Wall Street trading, he said.

 
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