Jeremy Glaser: For Morningstar.com, I'm Jeremy Glaser. The SEC filed a civil fraud suit against Goldman Sachs today, sending shares tumbling. I'm here with Goldman analyst Michael Wong to see exactly what this suit is about, and if it has the possibility of becoming a deepening crisis.
Michael, thanks for joining me today.
Michael Wong: Always great to be here.
Glaser: So first off, what were the details of this particular fraud investigation, or the fraud suit, that the SEC brought?
Wong: The fraud suit is a civil law suit. It's about Goldman supposedly misstating or omitting key information about a CDO, collateralized debt obligation, that it marketed. Paulson & Co., a very large hedge fund, had a part in selecting some of the securities in this portfolio that goes into the CDO. And that Paulson was actually shorting, expecting the CDO to fail, while Goldman was marketing it to long buyers.
Glaser: So it's a pretty limited suit. It's really based on just this one particular CDO, and not on the firm's entire operations, or anything like that?
Wong: That's where it's currently contained, but there is a chance that, while investigating this, they could unearth a broader range of supposedly somewhat fraudulent activities. And if that happens, Goldman could be inundated with additional lawsuits of some kind or additional SEC charges.Read Full Transcript
Glaser: Do you think this is going to have a big impact on Goldman's business?
Wong: At the moment, we don't believe there will be a material impact on Goldman's business. We have maybe three points where it could harm Goldman. The first point would be an SEC fine. Typically they have done slaps on the wrist, but this could be something larger. You can never tell.
A second point is with possible flight of institutional clients. They don't want to be on the short end of the stick of a Goldman trade or a Goldman product. If this really hurts Goldman's reputation in the eyes of institutional clients, that can cause some client flight.
And also just the chance that more fraudulent-type activity can be unearthed. And will lead to even more law suits down the line.
Glaser: Do you think this is sign that the SEC is now taking a more active stance in pursuing more of these fraud charges? And that we could see more suits filed, not only against Goldman, but against some of their investment banking competitors?
Wong: That is something we definitely have to be cautious of. It could infect the industry. SEC, the government, has really been trying to crack down on the investment banks. They were minting great profits, and taxpayers are not too happy with that at the moment. So we could see investigations expanded to more investment banks, and some more activity of this type might be uncovered.
Glaser: But as of right now, you're keeping your fair value estimates intact?
Wong: You can never know quite how these things will shake out. So currently we're maintaining our fair value estimates, which are based on the long-term earnings potentials of these companies.
Glaser: So this might be a short-term blip, but we don't think it's impaired the ability of these banks to earn money in the future?
Wong: No, we don't believe that at the moment. We have a long-term focus. Once this is past, they should continue to do fairly well.
Glaser: OK, Michael, thanks so much for talking with me today.
Wong: Thanks for having me.