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Did Goldman Manipulate Lehman, Bear Stock?

Monday, 21 Jul 2008 04:57 PM

Smart, prudent management helped Goldman Sachs Group dodge most of the credit crisis bullets while its rivals took a fusillade of hits. But now Goldman is the target of another assault.

Former Bear Stearns CEO Alan Schwartz, who presided over his firm's collapse last March, has asked a perhaps accusatory question of Goldman's CEO Lloyd Blankfein: Did Goldman manipulate Bear Stearns' stock?

Schwartz, however, said he did not believe Blankfein would "tolerate [such] misconduct," The Wall Street Journal reported recently.

Richard Fuld, Jr., CEO of Lehman Brothers Holdings, has asked Blankfein the same question.

"You're not going to like this conversation," Fuld reportedly told Blankfein.

Fuld says he has heard "a lot of noise" recently from unnamed sources about Goldman traders in the London office talking down Lehman Brothers stock.

Both Schwartz and Fuld asked their questions in the wake of talk that Goldman traders spread negative rumors about the two firms, leading to their financial problems.

Blankfein was reportedly shocked by the implications of Schwartz's and Fuld's questions.

Blankfein answered emphatically that he was unaware of the alleged manipulation and would "respond severely if he ever discovered such behavior by a Goldman trader."

"We went out of our way to be supportive of Bear and were rigorous about conducting business as usual," said Goldman spokesman Lucas van Praag in a strong denial of culpability in the matter, as reported in The Wall Street Journal recently.

Van Praag said Goldman never changed the terms by which they did business with Bear Stearns even as skittish creditors backed away from lending commitments and pulled capital as the company foundered.

But doubts still remain, and even the Securities and Exchange Commission is investigating the situation.

Now being scrutinized under the SEC microscope are Bear Stearns' trading documents including its equities, options or other instruments, which reflect a reduction of Bear Stearns' holdings by some investors in the weeks leading up to the everweakening company's implosion.

Reducing exposure to Bear Stearns during the countdown to its demise could've been a legitimate move as prescient investors saw the handwriting on the wall.

There was enough evidence of the firm's problems at the time to prompt such pullbacks.

Deliberately pulling back, however, in a concerted effort to foment fear and apprehension in the wider market resulting in the decline of a firm's stock price can be illegal.

Also illegal is manipulating the share price of a publicly traded company by spreading rumors known to be false. Penalties can range from heavy fines to imprisonment, depending on the circumstances of the manipulations.

But there may be considerable difficulty proving these alleged acts were purposefully designed to hurt Bear Stearns or Lehman — should the SEC ever initiate such an action.

In a related move aimed at squelching short sales designed to manipulate stock prices, the SEC has initiated emergency restraints against shorting the stock of Wall Street securities companies and stock in Freddie Mac and Fannie Mae.

The SEC is also considering imposing additional short-selling rules on the broader market.

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Smart, prudent management helped Goldman Sachs Group dodge most of the credit crisis bullets while its rivals took a fusillade of hits. But now Goldman is the target of another assault.Former Bear Stearns CEO Alan Schwartz, who presided over his firm's collapse last March,...
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2008-57-21
 

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