Goldman Sachs Group Inc. will not face criminal prosecution tied to sales of mortgage-linked securities as such a move could threaten the U.S. financial system, according to Brad Hintz, an analyst at Sanford C. Bernstein & Co.
The Justice Department, which is reviewing a Senate subcommittee report that alleged Goldman misled clients before the financial crisis, will avoid jeopardizing the fifth-largest U.S. bank by assets because it is viewed as "too big to fail," Hintz wrote in note to clients Wednesday.
"If an alleged violation is identified during a Goldman investigation, we expect a reasoned response from the Justice Department," Hintz wrote. "In a worst-case environment, we would expect a 'too big to fail' bank … to be offered a deferred-prosecution agreement, pay a significant fine and submit to a federal monitor in lieu of a criminal charge."
Stephen Cohen, a spokesman for the New York company, declined to comment on the note. Laura Sweeney, a Justice Department spokeswoman, did not reply to requests for comment.
Under a deferred-prosecution agreement, the U.S. files charges against a company and agrees to dismiss them after a certain period, typically if the company pays a fine or penalty and improves its governance or other practices.
Hintz, ranked the No. 1 analyst covering brokerage firms in a survey by Institutional Investor last year, said that the Justice Department's approach to criminal charges against companies has changed since the accounting firm Arthur Andersen LLP's business collapsed after a felony charge.
A 2003 Justice Department policy document "stated that prosecutors can reward cooperation by offering a negotiated settlement to a targeted company that can range from immunity from criminal indictment to a deferred-prosecution agreement," Hintz wrote. "The targeted company is treated not as a hardened criminal but as the equivalent of a juvenile offender that can be reformed."
Goldman's potential civil litigation risk tied to sales of mortgage-backed securities and collateralized debt obligations "is manageable," Hintz wrote, since the statute of limitations for many of the claims has passed.
Goldman's most senior employees, known as partners, have every incentive to put the firm's legal and political problems behind them, he wrote.
"As politicians continue to criticize the firm and the public scrutiny persists, we believe that Goldman's clients will begin to rethink their relationship with the firm and the franchise will ultimately suffer," Hintz wrote. "With approximately 17% of the ownership in the hands of current and former partners, this control group has ample motivation to make amends with politicians and the public in order to reduce the threat to its franchise."
In July, Goldman agreed to pay $550 million to settle a civil fraud suit by the Securities and Exchange Commission that alleged the firm misled clients about a mortgage-linked investment.
The settlement, in which Goldman admitted to making a "mistake," was agreed to three months after the firm's statement that the allegations "are completely unfounded in law and fact, and we will vigorously contest them and defend the firm and its reputation."
Fabrice Tourre, the only Goldman employee who was also sued by the SEC in that case, has not settled the suit.
