Credit Suisse Analysts Downplay Goldman Deal, Warn of New CDO Probes
Thursday's announced settlement between Goldman Sachs (GS) and the Securities and Exchange Commission (SEC) brings to a close the government's probe into allegations that the firm mislead investors, but analysts at Credit Suisse do not anticipate any material long-term impact on the global investment company. But analysts added they "would not be surprised" to see further regulatory actions with others active within the collateralized debt obligation (CDO) market. In an investor note published Thursday, Credit Suisse lead analyst Howard Chen acknowledged the $550m fine Goldman agreed to pay — the largest-ever SEC penalty for any Wall Street firm — is "significant," the absolute amount of the charge is digestible, and is equivalent to 1% of Goldman's Tier 1 capital of Goldman's 2010 earnings per share (EPS). The deal "importantly helps to remove an overhang that should help to heal GS and broker sector valuations," the commentary said. As part of the settlement, Goldman acknowledged its marketing materials for certain subprime mortgage products "contained incomplete information," according to an SEC statement. As a result, investors in synthetic CDOs, which perform only as well as the underlying subprime mortgage collateral, had "key facts" and "vital information" knowingly withheld. Of the $550m to be paid by Goldman in the settlement, $250m is reserved for harmed investors through a Fair Fund distribution and $300m will be paid to the US Treasury. The SEC alleged that Goldman failed to disclose this knowledge of the CDO, known as ABACUS 2007-AC1, as well as the role that hedge fund Paulson & Co. played in the portfolio selection process and the fact that Paulson had taken a short position against the CDO. "For Goldman, we do not anticipate any material long-term impact to the firm’s client franchise and would not envision any senior management changes related to the settlement," the note said. "Financially, we would anticipate some incremental litigation costs to account for outstanding shareholder lawsuits." Goldman Sachs is scheduled its release its Q210 earnings on July 20. Credit Suisse decreased its projections for Goldman's Q210 EPS to $0.77, from $1.77, and the 2010 annual EPS to $16.75, from $17.50, but did not amend its 2011 annual projection of $20. Write to Austin Kilgore. The author held no relevant investments.