Goldman Sachs faces backlash in Europe

LONDON/NEW YORK (AP) — Goldman Sachs is facing a potential backlash in Europe over the fraud case brought against it in the United States, with Britain’s Prime Minister Gordon Brown calling for authorities there to investigate and accusing the investment bank of “moral bankruptcy.”

Germany also said it would ask for detailed information about the case.

Both governments had to bail out banks that lost hundreds of millions of dollars on investments marketed by Goldman, according to the fraud suit brought by the US Securities and Exchange Commission, in Britain’s case Royal Bank of Scotland through its acquisition of parts of ABN Amro.

The SEC said the Royal Bank of Scotland paid Goldman $841 million to unwind ABN Amro transactions. Royal Bank of Scotland is now 84 percent owned by British taxpayers after being partly nationalized by the government.

Germany’s IKB Deutsche Industriebank AG, an early victim of the credit crunch, lost nearly all its $150 million investment, the SEC said.

Brown Sunday called for a full inquiry by Britain’s Financial Services Authority in conjunction with the SEC. Britain would join Germany, where government officials said they would seek information about the bank’s activities.

The US charges against Goldman Sachs relate to a complex investment tied to the performance of pools of risky mortgages. In a complaint filed Friday, the Securities and Exchange Commission alleged that Goldman marketed the package to investors without disclosing that the pools were picked by another client, a prominent hedge fund that wanted to bet the US housing bubble would burst. Within months, most of the mortgages had been downgraded as the US housing boom went into reverse and the securities fell sharply in value.

The company denies it did anything wrong, saying investor losses came from the deterioration of the whole sector, not regarding which securities were in the pool.

Goldman Sachs already is facing an EU investigation into a 2002 swap deal it carried out with Greece that may have helped hide the extent of the country’s financial troubles.

The Goldman Sachs case also may spur legal action in Germany. The Welt am Sonntag newspaper quoted Chancellor Angela Merkel’s spokesman, UIrich Wilhelm, as saying that German regulator BaFin will ask the US Securities and Exchange Commission for detailed information.

But while Goldman Sachs contends with the government’s civil fraud charges, an equally serious problem looms: a damaged reputation that may cost it clients.

The SEC’s bombshell civil fraud charge has tarnished the Wall St. bank’s already bruised image, analysts say. It could also hurt its ability to do business in an industry based largely on trust.

The company, founded in 1869, grew from a one-man outfit trading promissory notes in New York to the world’s most powerful, most profitable and arguably most envied securities and investment firm. From its 43-story glass-and-steel headquarters in Lower Manhattan, Goldman oversees a financial empire that spans more than 30 countries and includes more than 30,000 employees.

It has long attracted some of the world’s best and brightest. Some have gone on to lofty careers in public life, enhancing the firm’s aura of mystique and influence. Goldman alumni include former Treasury Secretaries Henry Paulson and Robert Rubin and former New Jersey Gov. Jon Corzine.

So far, no Goldman clients have publicly condemned the bank’s alleged actions. But the negative publicity and regulatory scrutiny could cause some to distance themselves, said Mark T. Williams, a professor of finance and economics at Boston University.