Goldman’s Role in Lloyd’s Bank Refi Deal Gets Scrutinized

After being accused by the U.S. Securities and Exchange Commission for misleading clients about Abacus, an esoteric investment tied to home mortgages, a new report from the Financial Times could further damage Goldman Sachs (GS) reputation with its Wall Street clientele.

FT reports that Goldman acted controversially on two sides, as both an underwriter and an investor, in Lloyd’s Banking Group’s massive $36 billion fund raising deal late last year.  It seems Goldman, which was advising Lloyds on its financial restructuring, failed to disclose a potential conflict of interest that may have resulted in making the terms of Lloyds Banking Group’s bailout more expensive.

According to FT, Goldman asked Lloyds to pay more money to the investors holding its debt while at the same time the bank itself (Goldman) had bought as much as half of the $1 billion issue of the debt, putting the firm in an excellent position to line its own pockets.

Those involved in the Lloyds refinancing told FT that Goldman insisted on the eve of the deal’s announcement that the extra interest payable on the bonds which were to be exchanged for new ones should be increased to as much as 2.5 per cent, when a consensus of other banks was 2 per cent. The rise followed a surprise cut in the credit rating assigned to the securities, making them a riskier investment.

Goldman was also involved in discussions about the ranking in a so-called waterfall determining which bonds should be prioritized for the exchange offer. “They were dictatorial about it,” said one person involved in the deal. Goldman bankers say its role as dealer manager was subservient to senior advisers, and did not allow it to dictate the terms of the waterfall.

Because the British government owns 41% of Lloyds, FT described Goldman’s role in the transaction, the biggest in corporate history, as ‘sensitive’. British Financial Services Authority announced this week it will begin a formal investigation into Goldman based on the SEC’s charges. Rightly or wrongly, it can’t be denied that Goldman Sachs, described by writter Matt Taibbi as “a great vampire squid wrapped around the face of humanity”, is the current favorite target of the financial press, regulators and governments around the globe.

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