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One hand giveth

10 Aug 2012 By Antony Currie

It was a bittersweet Thursday for Goldman Sachs. The Wall Street powerhouse received a double dose of good news from Washington, a rare and welcome event for investors and Chief Executive Lloyd Blankfein. First, the Securities and Exchange Commission dropped an investigation into a pre-crisis, Goldman-arranged $1.3 billion mortgage bond deal. Second, the U.S. Department of Justice decided it wouldn’t file criminal charges over the now-infamous Abacus deal. Yet Goldman was also forced to concede its legal worries are far from over.

Reserves stockpiled for litigation expenses jumped by a quarter, from $2.7 billion to $3.4 billion, between March and June. That’s a big leap given that the last time the SEC pursued Goldman – over the Abacus transaction – the settlement stung the bank for a cool $550 million.

The SEC’s latest case might not have been as potentially painful. The Abacus case was resolved in 2010, when the watchdog was keen to make an example out of Goldman. But even if the bank had socked away a smaller amount, it must surely have been able to release cash for this most recent investigation.

In any case, Goldman and its rivals are keeping their lawyers plenty busy. It looks like Blankfein and his colleagues may be the targets of some fresh claims. Citigroup also added to its legal reserves last quarter, to cover possible charges from an interchange lawsuit. Mounting mortgage litigation has been forcing other banks to top up legal reserves, too.

The process behind these funds is opaque. Companies only need to give boilerplate explanations and set aside what they consider to be reasonable costs for pending cases. That’s not only subjective, it’s tactical. Too high a figure can encourage the other side to push for a bigger deal.

Goldman can, of course, look on the bright side. Not having to face a criminal prosecution makes Blankfein’s position considerably safer. But with nearly a year’s worth of profit, based on annualizing the second-quarter tally, tied up for potential legal battles, shareholders can’t exactly consider the glass half full.


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