Goldman Pressed with Allegations - Analyst Blog
August 18 2011 - 10:39AM
Zacks
The Goldman Sachs Group Inc. (GS) and two of
its mortgage subsidiaries, along with M&T Bank
Corp. (MTB) was sued by bond insurer CIFG
Assurance North America Inc. The complaint lodged claims that
Goldman and M&T Bank misrepresented documents and convinced
CIFG to insure mortgage-backed securities worth $275 million.
CIFG alleged that Goldman and its subsidiaries along with
M&T Bank issued misleading statements and omissions related to
the mortgage-backed securities from a portfolio of 6,204 loans,
most of which were made by M&T Bank, which has concealed risks
associated with the securities.
The bond insurer also claimed that Goldman and M&T Bank did
not fully reveal the quality of the securitized portfolio and
concerns associated with the mortgage market. Goldman sold the
portfolio GSAA Home Equity Trust 2007-S1 in February 2007 after
getting it insured from CIFG by presenting untrue statements.
CIFG has filed lawsuit in the New York State Supreme Court in
Manhattan. The company’s demands for damages include repayment of
compensation, to be paid by CIFG and an order for Goldman and
M&T Bank to repurchase the nonperforming loans from the
portfolio.
Earlier this week, Goldman was also sued by The Allstate
Corporation (ALL), the largest publicly traded U.S. home
and auto insurer. The complaint lodged claims that Goldman
misrepresented documents as an underwriter in the sale of over $123
million in mortgage-backed securities from April 2006 to March
2007.
Last week, Goldman was sued by National Credit Union
Administration (NCUA), the U.S. regulator of credit unions. The
complaint lodged claims that Goldman violated federal and state
securities laws and misrepresented documents as an underwriter in
the sale of $1.2 billion in mortgage-backed securities.
However, the regulators are proactively trying to recover losses
of credit unions through lawsuits against banks that were involved
in malpractices related to selling mortgage-backed securities. The
proceeds from these lawsuits would increase NCUA's insurance and
emergency support funds to a considerable extent.
Earlier in July, Goldman was also sued by Liberty Mutual
Insurance Co. and several other investors including Peerless
Insurance Co., Employers Insurance Co., Safeco and Liberty Life
Assurance Co. for misrepresenting the financial condition of
Freddie Mac (FMCC) as an underwriter of Freddie's
offering of Series Z preferred stock in late 2007.
According to the lawsuit, Freddie Mac issued 240 million shares
of Series Z preferred shares in November 2007, which increased
approximately $5.9 billion. The shares were supported by billions
of dollars in subprime residential mortgages. The investors alleged
that Goldman misled them with statements and omissions related to
the preferred stock offering based on which they invested $37.5
billion.
Last year, Goldman settled a charge by paying $550 million for
not disclosing the buyers the role of a hedge fund in formulating
the CDOs and taking a short position and betting on them to perform
poorly in the open market. The SEC has stepped up its investigation
on Wall Street companies over the sale of CDOs that were
responsible for significant losses suffered by the investors and
financial crisis.
The continuous increasing number of lawsuits will dent Goldman’s
reputation and its financials, though investors, who have lost
their hard-earned money in such investments, should feel
relieved.
Shares of Goldman currently retain a Zacks #3 Rank, which
translates into a short-term Hold rating. However, considering the
fundamentals, we maintain a long-term Underperform recommendation
on the stock.
ALLSTATE CORP (ALL): Free Stock Analysis Report
FREDDIE MAC (FMCC): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
M&T BANK CORP (MTB): Free Stock Analysis Report
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