Tags: Banking, CDOs, Corruption, Fraud, Goldman Sachs, Investment Bankers, Paulson & Co., SEC

Goldman's First-Quarter Profit Doubles to $3.46 Billion, Even as its Fraud Probe Takes on an International Twist

By , Associate Editor, Money Morning •

Investment-banking giant Goldman Sachs Group Inc. (NYSE: GS) - the target of a civil fraud case filed by U.S. securities regulators - yesterday reported that its first-quarter earnings nearly doubled, even as the probe against it took on an international twist.

The New York-based Goldman said it earned reported first quarter earnings of $3.46 billion today (Tuesday), or $5.59 a share, an increase of 91% from earnings of $1.66 billion, or $3.39 a share, for the same period a year ago. The earnings report came just days after the U.S. Securities and Exchange Commission filed a civil fraud case against the Wall Street financial heavyweight.

Goldman's earnings beat analysts' average estimates of $4.16 a share. Its investment bank income revenue rose to $12.78 billion, and its fixed-income, currency and commodities trading generated net revenue of $7.39 billion.

"Our performance in the first quarter reflects more signs of growth across the economy and the strength of our client franchise," Goldman Sachs Chief Executive Officer Lloyd C. Blankfein said in a statement. "In light of recent events involving the firm, we appreciate the support of our clients and shareholders, and the dedication and commitment of our people."

The strong earnings were not enough to overshadow the "recent events" in question that have investors concerned, the company said yesterday. Those worries will likely grow in the days and weeks to come now that British Kingdom regulators say that they, too, are investigating alleged acts of fraud by Goldman.

Goldman Sachs shares fell $3.34 each, or 2.05%, to close at $159.98 yesterday.

The SEC last week accused Goldman Sachs of failing to disclose vital information on a synthetic collateralized debt obligation (CDO) that was allegedly peddled to clients, even as the investment bank bet against the security's success, knowing that it was likely to emerge as the winner.

The SEC says Goldman used hedge fund Paulson & Co. to pick particularly risky securities for the product with a higher chance of collapsing.

"We would never intentionally mislead anyone, certainly not our clients or counterparties," Goldman Sachs co-general counsel Greg Palm said during a conference call yesterday. "We certainly had no incentive to design a transaction that was designed to lose money. We are very disappointed that the SEC would bring this action, which relates to a single synthetic CDO transaction involving two professional institutional investors, in the face of an extensive record which we believe establishes the allegations are unfounded."

Analysts are concerned that the lawsuit will damage Goldman's already-tarnished reputation so much that clients will defect to other firms. Pundits and other observers also say the suit could jump-start financial reform efforts yet again, given that a reform proposal is now making the rounds within Congress.

The SEC's first strike against the financial giant could also lead to more lawsuits. The United Kingdom's financial regulator, the Financial Services Authority, already announced it will investigate Goldman Sachs' London offices for fraud.

"There are legitimate concerns over the long-term impact on Goldman's market share, as some clients may be deterred from doing the same level of business with a firm that is perceived to be a regulatory target," Steve Stelmach, analyst at FBR Capital Markets Corp. (Nasdaq: FBCM), wrote in a research note Monday.

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