German bank severs Goldman ties, France eyes probe

BOSTON/FRANKFURT (Reuters) - A German state bank said it had severed business ties with Goldman Sachs Group Inc, citing U.S. regulators' allegation that the dominant Wall Street bank committed fraud, while France eyed an investigation of its own.

Goldman is accused of defrauding investors by failing to say that prominent hedge fund manager John Paulson bet against a Goldman subprime debt product that he helped design.

In the latest sign that the U.S. Securities and Exchange Commission's allegations could hurt Goldman's standing with some customers, the SEC complaint was cited by German public sector bank BayernLB as it cut business ties with Goldman.

Another German bank, IKB Deutsche Industriebank AG, was one of the main investors in the Abacus synthetic collateralized debt obligation deal that is the focus of the SEC complaint.

Goldman, which is being investigated by the Securities and Exchange Commission (SEC) and Britain's market watchdog, is also attracting attention in France.

Economy Minister Christine Lagarde said on Wednesday that the accusations also warranted a full probe by French regulators. Regulator AMF (Autorite des Marches Financiers) said earlier this week that it planned to co-operate with the SEC over the Goldman case if necessary, adding on Wednesday that it aimed to publish an update on the probe next week.

Goldman shares ended down about 0.7 percent on Wednesday, bringing their decline over the last week to 14 percent. The sectoral Amex Securities Broker Dealer index has lost 2.1 percent over the same period.

But archrival Morgan Stanley, which reported better earnings than expected, outperformed Goldman, with shares rising 4 percent on the day.

The cost to insure Goldman's debt widened to about 133 basis points from about 122 basis points late on Tuesday.

'UNCERTAINTY ABOUNDS'

Goldman itself reported blowout earnings on Tuesday, but so far has gained little credit from investors who remain concerned about the fallout from the SEC accusations.

"Uncertainty abounds, and headline risk should drive near-term volatility," Sandler O'Neill analyst Jeff Harte wrote in a research note, adding that he believed the "reputational and financial risks seem manageable."

Lawyers for shareholders are studying legal action against Goldman Sachs in the wake of fraud charges against the bank, but they could be hampered by the difficulty of building a case.

"I would not be surprised if this spurred litigation from shareholders or from securities purchasers," said Stuart Grant, managing director of Grant & Eisenhofer.

The firm represents shareholders on corporate governance and securities litigation and Grant said clients had contacted the firm about Goldman Sachs.

"If we're looking at it, there are others looking at it," said Grant.

Newly released official documents showed that Goldman aggressively increased political campaign donations and lobby spending in Congress in early 2010, as the financial reform debate gathered momentum.

In another sign that Goldman and its Wall Street allies are struggling to gain traction in Washington, a U.S. Senate committee approved on Wednesday a bill aimed at reforming the derivatives market, moving the Senate one step closer to passing sweeping regulation over the $450 trillion derivatives market.

Criticism from some quarters that the SEC suit was politically motivated was fueled by the revelation this week that the SEC's commissioners split 3-2 on whether to pursue the complaint, with both Republican commissioners dissenting.

President Barack Obama, who has made regulatory reform a cornerstone of his agenda, said "categorically" that the SEC had never discussed the case with the White House.

"They've never discussed with us anything with respect to the charges that will be brought," Obama said in an interview with CNBC.

SEC Chairman Mary Schapiro also strenuously denied that there was any political motivation for the probe.

"We will neither bring cases, nor refrain from bringing them, because of the political consequences," she said in a statement. "We will be governed always and only by the facts and the law."

RIVALS CIRCLE

Paulson, in a conference call on Monday and again on Tuesday in a letter to investors, said neither he nor anyone at the firm had received a so-called Wells notice indicating that charges might be filed against the fund, several investors who listened to the call said.

On Wednesday more investors were able to dial in and hear Paulson reiterate that no one at the firm was being targeted in the government's probe and that he was always open with his concerns about the mortgage market.

The company said that redemption requests are lower than usual at the moment. Investors have until April 30 to notify Paulson if they want their money back by the end of the second quarter.

Paolo Pellegrini, a former top executive at Paulson & Co, told investigators at the SEC that he had informed ACA Management LLC that his firm was betting against the transaction, The Wall Street Journal reported on Wednesday.

ACA was the outside manager tapped to oversee the transaction at the heart of the SEC complaint.

Meanwhile, the sole Goldman Sachs employee being sued by the SEC in the case, 31-year-old Frenchman Fabrice Tourre, has agreed to testify at a Senate hearing next week, Bloomberg News reported.

Goldman Sachs Chief Executive Lloyd Blankfein, who has maintained a low public profile since the enforcement action was announced, will also be questioned at the hearing, a source familiar with the matter told Reuters.

Rival institutions in Asia were seizing the chance to try to elbow in front of Goldman on major upcoming deals, sources familiar with the matter told Reuters.

A survey of corporate executives ranging from CEOs to chief marketing officers found that a majority, 55 percent, felt that Goldman was guilty, while 21 percent viewed it as innocent and 24 percent were unsure, according to Argyle Executive Forum, an organizer of professional conferences.

(Additional reporting by Steve Eder and Paritosh Bansal in NEW YORK, Christopher Doering, Andy Sullivan, Roberta Rampton and Dan Margolies in WASHINGTON; Sudip Kar-Gupta in PARIS, Christian Kraemer in MUNICH and Alexander Huebner in FRANKFURT; George Chen and Fiona Lau in HONG KONG and Steve Slater in LONDON; Writing by Christian Plumb and Lincoln Feast; Editing by Ian Geoghegan and Matthew Lewis)