The never ending saga continues for the Goldman Sachs (NYSE:GS) bank who has been the target of a stream of investigations by the Securities and Exchange Commission and the U.S. Department of Justice. The legal and accounting fees, as well as the cost of settlements, has grown substantially over the past few years, threatening to overwhelm the reserves set aside to deal with these big problems.
Growing Legal Problems
The SEC has come calling on Goldman Sachs to account for a huge myriad of issues and problems.
In 2010, the company agreed to pay a $550 million settlement for selling mortgage securities that cashed in on the mortgage market's collapse. Soon after that settlement, other legal issues were revealed regarding Goldman's dealings with broker-dealers. In 2012, another case alleging the sale of misrepresented sub-prime mortgages being sold as investments dogged the company. In August of 2013, a class action suit alleging Goldman inflated aluminum prices benefiting warehouses the company owned came about. This potential headache is just the latest allegation that Goldman is facing.
CEO Lloyd Blankfein has shepherded the company through these issues as skillfully as he can, but the sheer number and depth of the investigations is causing an increasing drain on the funds set aside for the managing these outcomes. Inevitably, the rising costs to defend the company against these legal cases affect their ability to provide a predictable return to their investors which includes Warren Buffett at Berkshire Hathaway (NYSE:BRK.B) who helped the firm survive the Great Recession.
Growing Cost of Legal Fees
In case after case, Goldman has had to pay hefty legal and accounting fees to defend the company from accusations that the company was profiting itself instead of its clients. The firm is now providing many of New York's finest legal and accounting eagles a fair amount of late night billable hours.
Many of the company's attempts to have these suits dismissed have failed. The problem has grown to such an extent that the Chief Financial Officer Harvey Schwartz has had to lift the ceiling on the expected amount of legal costs by $500 million and said it could ultimately exceed reserves by $4 billion dollars. Though the stock price has rallied at various points in hopes that the end of the legal woes are in sight, these problems continue to plague the company.
Investors have to follow their own inclinations and instincts regarding Goldman's future. If you are inclined to believe in the track record of this company, you will be likely to hold on during this rocky period of investigation and payout and wait for smoother sailing ahead. Goldman clearly has a great collection of smart and motivated people who are willing to work for their shareholders many hours a week.
However, if you find you are concerned about the growing current problems and expect to see more of the same in the months ahead like we do, you may feel this is a good place to take a cautious stance and sell a portion of your GS stock position or at least hold back on further purchases of the stock until the skies are brighter for this perceived Wall Street icon.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.