Monday, July 19, 2010
Europe freezes out Goldman Sachs
European governments are turning their backs on Goldman Sachs, the all-conquering investment bank that has suffered a series of blows to its reputation, capped by the biggest ever fine imposed on a Wall Street firm.
According to data from Dealogic, Greece, Spain, France and Italy have all denied the bank a lead role in their recent sovereign bond sales.
Last Thursday, Goldman agreed to pay a $550m fine to settle US regulators' claims that the bank misled investors in a mortgage-backed security. Goldman admitted that its marketing materials were incomplete, because they failed to state that the same third party that helped choose the assets had taken a bet against them.
But governments have also been shocked at the emergence of past transactions between Goldman and Greece and Italy, where products the bank helped to sell aided both in hiding government debt. Greece, which used Goldman in a bond sale this year, is practically at war with the bank. A sharp contrast with the situation months before, when Goldman bankers dined with the prime minister in a private meeting overlooking the Acropolis. The relationship broke down, though, after news leaked earlier this year that Goldman was about to strike a bond sale deal with China's sovereign fund – which never materialised.
Spain, which used Goldman among its top 10 bookrunners last year, has not done so in 2010, while Italy has not given the bank a leading role since 2007. France has not used Goldman in any lead position over the past three years, and it seems doubtful that it will do so in the near future. "French people would riot in the streets if we chose Goldman," said a person familiar with the French treasury.
The French government has said it will only use banks that cap management and traders' bonuses. This year, Goldman limited the pay and bonus compensation to its London partners at £1m, though other bankers and traders can receive much more, provided they are not partners. Goldman has also been criticised of for taking short positions, or betting on a price fall, against some European sovereign bonds – after taking part in a bond sale, a person involved in sovereign debt sales said. The bank says it has presence in the European sovereign bank market and that it has recently participated in deals in Britain, Portugal and Belgium.
Countries such as Spain and France have also shied away from Goldman because their traditionally conservative treasury departments prefer to steer clear of risky investments. The French treasury, for instance, only issues debt in euros, staying away, like Spain, from the complex foreign exchange or swap deals that brought trouble to Greece and Italy. "The Spanish treasury can't justify in parliament why, if things go wrong, they have a multimillion-euro position in Indian rupees, for example," a sovereign bond banker said.
Governments also stick to plain-vanilla deals, with little complexity, in order to keep their prized AAA rating, reducing their borrowing costs as much as possible, a source familiar with the French Tresor said.
IKB, the failed bank bailed out by the German government, recently considered suing Goldman because of its exposure to the structured products sold by the US bank. Following the settlement between Goldman and the SEC, the US securities regulator, last week, IKB said the German lender was "reviewing the settlement documents".
Germany has only made one syndicated bond sale in the last three years, in 2009, when it appointed Deutsche Bank, Citibank, HSBC and BofA-Merrill Lynch as lead managers.