Goldman Sachs faces subpoena in meltdown inquiry

By Christina Rexrode and Rachel Beck
Associated Press / June 3, 2011

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NEW YORK — Goldman Sachs Group was subpoenaed by the Manhattan district attorney’s office over the investment bank’s activities leading up to the financial crisis, a person familiar with the matter said.

Shares of Goldman fell nearly 2 percent to $133.88 a share yesterday after Bloomberg News reported that the bank had been subpoenaed. Goldman’s shares are down 20 percent so far this year and are at levels not seen since last July.

Goldman has been watched by lawmakers and regulators since marketing risky investments that bet on the housing market’s success just before the mortgage meltdown. Simultaneously the bank reaped billions of dollars from its own bets that the housing market would collapse. Those gains have also made it the target of intense media scrutiny and public outrage.

“This is just another thorn in Goldman’s side,’’ says Peter Henning, a professor of law at Wayne State University in Detroit. The request for information from Goldman is the first stage of an investigation, but it does not mean the company will necessarily face charges, Henning said.

The subpoena follows the release in April of a 639-page Senate report that showed Goldman had steered investors toward mortgage securities it knew would be likely to fail.

The report, which was the result of a Senate panel investigation of the financial crisis, found that Goldman marketed four sets of complex mortgage securities to banks and other investors. The report said the firm failed to tell the banks and investors that the securities were very risky, secretly bet against the investors’ positions, and deceived them about its own positions. The report said this was part of Goldman’s effort to shift risk from its balance sheet to those of investors.

Senator Carl Levin, a Michigan Democrat who heads the panel, said at the time the report was released that he planned to convey findings to the Justice Department and the Securities and Exchange Commission for possible further investigation.

One Goldman investor questioned what new material the Manhattan District Attorney might be looking for in its investigation. “I think the news here is that you really can’t tell how much more of this there’s going to be. Did the [Securities and Exchange Commission] settlement eradicate all the termites?’’ said Michael Farr, president and chief investment officer of Farr, Miller & Washington, an investment firm that owns 60,000 Goldman shares.

Well-known bank analyst Dick Bove cut his rating on Goldman to “sell’’ shortly after the congressional report was released. He said yesterday that he believes the storied investment bank will continue to endure confrontations from the government “until it shows serious contrition.’’