DBRS Comments on Goldman Sachs Agreement to Settle SEC Allegations of Fraud Charges – Sr at A (high)

DBRS has today commented on The Goldman Sachs Group, Inc.’s (Goldman or the Company) agreement to settle the fraud charges brought forth by the Securities and Exchange Commission (SEC) on April 16, 2010. Under the agreement, the Company, without admitting or denying any wrongdoing, acknowledged that it made a mistake in the preparation of its marketing materials by omitting certain relevant disclosures and also agreed to certain undertakings regarding enhancements to its policies and processes. The civil complaint alleged that Goldman Sachs & Co. (GS&Co.) and a GS&Co. employee defrauded investors by misstating and omitting key facts in the structuring and marketing of a synthetic CDO tied to subprime mortgages. GS&Co. is Goldman’s principal U.S. broker-dealer subsidiary. In its settlement with the SEC, Goldman agreed to pay a $550 million penalty, of which $250 million would be returned to investors and $300 million would be paid to the U.S. Treasury. The agreement is still subject to judicial approval. DBRS currently rates Goldman’s Issuer & Senior Debt at A (high) and its Short-Term Instruments at R-1 (middle). The trend on all ratings is Stable.

DBRS views the potential impact of this particular complaint as having been largely resolved. While the penalty is substantial, Goldman can absorb this cost through its quarterly earnings. In DBRS’s opinion, the greatest impact of this allegation on the Company was the negative affect on Goldman’s reputation and the potential for much more severe consequences for its franchise. While DBRS recognizes that the Company has largely dealt with this major issue, DBRS still sees the Company, like other major U.S. financial institutions, as facing potential legal and reputational risks that could arise from the ongoing efforts of the SEC and other government agencies in their investigations stemming from the financial crisis, as well as potential legal action by investors. Although the settlement requires Goldman to pay an unprecedented penalty by a Wall Street firm, DBRS nevertheless views the resolving of this allegation as an appropriate step for the Company.

Underpinning DBRS’s current ratings are Goldman’s diversified businesses across its global franchise. The ratings consider the resiliency of this franchise, its strong performance across Goldman’s many capital markets businesses and the strength of its underlying earnings during this cycle. Additionally, the Company has improved its risk profile, strengthened its capitalization and enhanced its liquidity.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.