Securities scrutiny puts damper on profit report

NEW YORK – Goldman Sachs is still the king of Wall Street – at least when it comes to making money.

Four days after being accused by the government of fraud in the subprime mortgage mess, the big investment bank on Tuesday reported blowout first-quarter profits of $3.3 billion, nearly double from the same period a year ago. But it didn’t get to celebrate.

Goldman spent the day defending itself against the Securities and Exchange Commission’s charges and saw its troubles mount:

• Britain’s financial regulator began an investigation into the bank’s London-based international operations.

• The European Commission called for tighter regulation of the complex financial investments at the heart of the SEC case.

• Investors brushed off the eye-popping earnings and sent Goldman’s stock falling more than 2 percent. In the past three days, the company’s market value has declined by nearly $13 billion.

Jack A. Ablin, chief investment officer at Harris Private Bank in Chicago, said he couldn’t recall another time when a company reported such stellar earnings only to see its stock fall.

Goldman Sachs Group Inc. executives held conference calls with banking industry analysts and reporters Tuesday, but the questions focused more on the SEC charges than on the firm’s earnings.

The charges grew out of a 2007 transaction involving collateralized debt obligations, or CDOs, complex mortgage-related securities that many analysts say helped accelerate the financial crisis and recession when they plunged in value. The government said Goldman did not tell two clients that the CDOs they bought were crafted in part by billionaire hedge fund manager John Paulson, who was betting on them to fail. Goldman has denied the charge.

“Clearly, there’s a potential for things to get worse,” market analyst Edward Yardeni said, citing the widening probe of the bank’s dealings. “The question is how will their clients react.”

Goldman and the other big banks have come under sharp criticism from the Obama administration and Congress, especially since they have paid big bonuses to employees after having accepted bailout money during the financial crisis in 2008. Goldman was one of the first banks to repay the money under the Troubled Asset Relief Program. Many critics note that big banks’ trading practices helped cause the crisis.

During a conference call with analysts, Goldman co-general counsel Greg Palm gave the company’s most detailed rebuttal to date of the SEC charges.

The SEC charged that Goldman misled investors. Palm responded that the two clients in the transaction, IKB Deutsche Industriebank AG and the financial consulting firm ACA Management LLC, “were institutions with significant resources and extensive experience in the CDO market.”

“We would never intentionally mislead anyone,” Palm said.

The company told analysts that it lost more than $100 million on the transaction. Analysts have speculated that Goldman lost money because it was unable to sell its position before its value declined. Asked about that, Palm acknowledged for the first time that the bank did indeed try to find a buyer.