Back to top

Analyst Blog

Legal hassles continue to weigh on The Goldman Sachs Group, Inc. (GS - Analyst Report) as the company’s stock price decreased nearly 1.0% after a state appeals court in New York last Thursday declined its plea to terminate a lawsuit against it. The case, related to the sale of the company’s collateralized debt obligations (CDOs) also known as Timberwolf and Point Pleasant, was filed by the Australian hedge fund Basis Capital Funds Management Ltd. in New York State Supreme Court in Oct, 2011.

It was alleged that Goldman was well acquainted with the fact that the value of the aforementioned securities would decline in future. The company strategically concealed relevant information and sold them to investors.

Further, Goldman used these CDOs to short the market. Therefore, the company made huge profits once the price of these securities fell, while the investors had to bear huge losses.

Basis Capital Funds Management has claimed $67.0 million to compensate for the losses incurred. Moreover, it seeks an additional $1 billion for punitive damages.  

Goldman, in a vain attempt to defend itself, tried to relate the collapse of the housing market as the cause of the incurred loss.

The overall crisis as well as housing market turmoil no doubt resulted in huge losses for the investors. However, the actual cause stemmed from the unfair practices of the Wall Street Biggies in the pre-crisis period to maximize their profits. Therefore, Goldman’s securities, like many others’, did not fail because of an unstable market. Instead, it contributed to the economic turbulence

Following the financial crisis, the regulatory bodies have been maintaining a strict check on the financial organizations in the country. This has pressurized the earnings and payouts in the short term. However, the stringent regulations prioritize investors’ well being by providing them a more secure investment environment.

Apart from Goldman, other major U.S. banks that continue to face legal disputes related to sale of risky mortgage-linked securities include Morgan Stanley (MS - Analyst Report), JPMorgan Chase & Co. (JPM - Analyst Report) and Bank of America Corp. (BAC - Analyst Report).

Please login to Zacks.com or register to post a comment.