GMP Independent Financial Advisors LLP

Mon, 19 Apr 2010 16:49:36 GMT

After a benign few weeks of gently rising markets, stock indices plunged last week on news Goldman Sachs is to be charged by the US Securities and Exchange Commission (SEC) for fraud. In particular, banking shares tumbled on the possibility more charges might be brought in the sector, undermining their already fragile recovery.

The allegations surround one hedge fund, constructed by Paulson & Co and marketed by Goldman. The SEC believes Goldman misstated and omitted key information about the contents of the hedge fund, betting against the securities held within the fund and thereby condemning it to fail. Goldman has denied the allegations, saying they are wrong in law and in fact.

What does it mean for Goldman? Goldman has never been a slave to public opinion and the fact the scandal has suggested one of its vice presidents is the worst kind of boastful investment banker is unlikely to trouble it much because most of its clients are institutional. However, there will be concern at allegations Goldman has lined its own pockets at the expense of clients. Most will need some reassurance the firm has put such practices behind it.

But what does it mean for the wider banking community? There is a danger similarly fraudulent activity has taken place at other banks and the SEC has demonstrated it is not in the mood to forgive. However, the SEC does not have infinite resources and it has been clear for some time Goldman was its desired scalp.

The bosses at Goldman have irritated the authorities by implying they were in no need of government help. Their lack of humility in the face of public outrage at the banking community has made them an obvious target. On balance it seems widespread contagion is unlikely.

Could it unhinge the nascent recovery in equity markets? Markets have moved up a reasonable distance and it has been suggested many investors had been looking for an excuse to sell. Certainly, it is difficult to see how the problems at Goldmans outweigh the recent recovery in earnings and growth with strong results from market behemoths such as Intel and JP Morgan and better global GDP data.

Ultimately, it seems unlikely the problems at Goldman will cause anything more than a temporary blip in markets. Better news on the economy and on earnings should revive markets fairly quickly. Goldman Sachs is important, but not that important.

For all your investment needs please call Mark or Clare at GMP Independent Financial Advisers LLP on 0207 2886400

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