Goldman Sachs Group Inc. in danger of losing business with a key group of clients as a result of the fraud allegations it faces: governments in Europe and the U.S.
Politicians in the U.K. and Germany are starting to call on their governments to cut ties with Goldman, which has long been one of the top financial advisers to European policy makers.
U.K. Liberal Democrat leader Nick Clegg, riding high in opinion polls less than three weeks before national elections, said on Tuesday that Goldman "should now be suspended in its role as one of the advisers to the government until these allegations are properly looked into." His comments follow Prime Minister Gordon Brown's recent characterization of Goldman's alleged behavior as "morally bankrupt."
"We should let the business relationship with [Goldman] rest until the allegations are cleared up," lawmaker Frank SchÃ¤ffler of Germany's Free Democratic Party, part of Chancellor Angela Merkel's governing coalition, told German newspaper Handelsblatt on Tuesday. Mr. SchÃ¤ffler's office confirmed the comment.
The New York-based bank denies allegations by the U.S. Securities and Exchange Commission that it committed fraud by withholding important information from investors to whom it sold mortgage-related securities.
'[Goldman] should now be suspended in its role as one of the advisers to the government until these allegations are properly looked into,' said Nick Clegg, leader of Britain's Liberal Democrats.
But the political backlash in Europe and the U.S. threatens to damage the network of political ties with policy makers that the bank has carefully built up on both sides of the Atlantic over two decades.
Goldman declined to comment on the European politicians' remarks. In a message to employees on Sunday, Lloyd C. Blankfein, Goldman's chairman and chief executive, said the bank was "taking all appropriate steps to defend the firm and its reputation."
Fair or not, the growing perception in Europe that Goldman used cutthroat tactics to turn a profit could make it an unpalatable partner for politicians who are facing voter pressure to clamp down on risk-taking by the financial sector, analysts say.
The firm is among the leading arrangers of government bond issues in Britain, Germany and many other European countries, and has a played a prominent role in privatizations in both countries.
[goldman0420] Associated Press
Goldman Sachs chief Lloyd Blankfein
In the U.S., the poisonous atmosphere surrounding Goldman Sachs has done more than just provide fodder for "Saturday Night Live." Anger toward Goldman was at play when the Treasury Department selected a manager to oversee the sale of the government's $32 billion stake in Citigroup Inc.
Career officials at the Treasury chose Morgan Stanley to manage the account, and said the decision was based on the firm's ability to do the work. But at the time of the decision, an administration official said there was recognition inside the government that choosing Goldman, which has similar expertise, could trigger a firestorm.
The SEC probe has resonated in Europe because the Goldman transaction in question led to write-downs at British and German banks that later needed taxpayer bailouts. Royal Bank of Scotland PLC of the U.K. lost $841 million on the deal, while IKB Industrie Bank AG of Germany lost $150 million, according to the SEC. RBS and IKB declined to comment.
With the U.K. in the midst of a heated election campaign, the charges against Goldman have made the bank an attractive target.
Mr. Clegg, speaking at a news conference in London, called the SEC's allegations against Goldman "extremely serious" and a sign of "how reckless and greed the global banking industry had become" in the run-up to the 2008 financial crisis.
The Conservative Party also joined in, seizing on Mr. Brown's criticism of Goldman.
"Why is he still using them as advisers?" asked Mark Hoban, a top Conservative finance official.
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U.K. Treasury chief Alistair Darling rejected calls to ostracize the U.S. bank. "I don't think you can stop doing business with a firm because an individual is accused of doing something," Mr. Darling said in an interview with Bloomberg News. Mr. Darling's spokeswoman confirmed the remarks.
Conservatives and Liberal Democrats are competing to oust Labour leader Mr. Brown from power in elections due May 6.
In Germany, Bavarian conservatives also said government dealings with Goldman should be put on ice.
'I don't think you can stop doing business with a firm because an individual is accused of doing something,' said Alistair Darling, the U.K. Treasury chief.
The German finance ministry said it will examine the SEC case against Goldman before deciding on what steps, if any, to take. A finance ministry official said it was "completely open" whether possible steps might include dropping Goldman as an adviser or securities underwriter, because Berlin is still waiting for information about the case from the SEC.
Chancellor Merkel's spokesman Ulrich Wilhelm said over the weekend that Germany might take legal action, depending on its assessment of the allegations against Goldman. German authorities are waiting for further information from the SEC, officials in Berlin said Tuesday.
Goldman has already faced criticism in Europe this year for a series of transactions with Greece that exploited loopholes in EU accounting rules and had the effect of understating Greece's budget deficit. The transactions, which took place nearly a decade ago, have helped to undermine financial markets' confidence in Greece's official statistics, contributing to a debt crisis that has pushed Greece to the verge of a bailout by the European Union and the International Monetary Fund.
Analysts at BNP Paribas said last week's SEC accusations are "a massive blow" to Goldman's reputation, "which was already under pressure due to the Greek swap episode and other issues."
Goldman's Mr. Blankfein drew ire from U.S. and European officials late last year by quipping that the bank does "God's work." The head of Goldman's German operations, Alexander Dibelius, sparked more controversy in January by saying banks "do not have an obligation to promote the public good."
Bankers from rival firms have complained in recent months that Goldman's worsening public image is adding to the political momentum behind a regulatory clampdown on the whole sector.
Political Backlash in Europe Over Goldman - WSJ.com