Goldman Sachs: Assessing Litigation Riskonline.wsj.com/public/resources/documents/060711goldmandoc.pdf · 01-06-2011 · Goldman Sachs: Assessing Litigation Risk Ticker Rating CUR

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Brad Hintz (Senior Analyst) • [email protected] • +1-212-756-4590

Vincent M. Curotto • [email protected] • +1-212-756-1882

Luke Montgomery, CFA • [email protected] • +1-212-969-6714

See Disclosure Appendix of this report for important disclosures and analyst certifications.

Goldman Sachs: Assessing Litigation Risk

Ticker Rating CUR

31 May 2011ClosingPrice

TargetPrice

TTMRel.Perf.

EPS P/E

2010A 2011E 2012E 2010A 2011E 2012E Yield

GS O USD 140.73 205.00 -25.9% 13.18 15.82 21.20 10.7 8.9 6.6 1.1%

SPX 1345.20 85.28 99.29 112.75 15.8 13.5 11.9 1.9%

O – Outperform, M – Market-Perform, U – Underperform, N – Not Rated

Highlights

Goldman Sachs navigated the rocky waters of the 2007-2009 credit crisis more successfully than any other investment bank. However, rather than being lauded for their success, the firm has been vilified as the devil incarnate. Perception is a powerful force in American business. The fundamental question facing Goldman's investors is whether Goldman Sachs can operate as a global investment bank if there is perception among regulators and the public that the firm makes money by cheating its customers. Simply stated, our answer is "No".

Goldman's partners are well aware of the significance of public perception and are not naïve about the ways of Washington. They understand Goldman's capital markets businesses need a constant flow of trade volume and new deal mandates from clients to generate earnings. As politicians continue to criticize the firm and public scrutiny persists, we believe that Goldman's clients will begin to rethink their relationship with the firm and the franchise will ultimately suffer. 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.

Recent Congressional reports and related press stories have reignited the fears of potential litigation risk for the firm. GS shares have underperformed accordingly, prompting an analysis of outstanding litigation risk to the firm. Bernstein's attached analysis reviews the legal risks1 facing Goldman Sachs, divided into potential civil and criminal risks.

Civil: Much of Goldman's civil litigation risk relates to MBS and CDOs emanating from the crisis. We believe the analysis indicates that the potential litigation liability of firm is manageable. The firm was not a major player in the MBS or the subprime market. Disclosure issues related to MBS underwriting are not the direct cause of mortgage backed losses. Goldman's CDOs were structured as 144A private placements which were sold to QIBs and the firm reduced the volume of CDOs it arranged after 2005, as collateral quality fell in the MBS market. Furthermore, Goldman CDOs have outperformed those of other firms on a relative basis. Nearly all of Goldman's CDO and MBS legacy volumes have passed the three year statute of limitations of claims under Section 11 and Section 122 and most have passed the five year limit of Section 10(b)5. These factors make it difficult for plaintiffs to successfully pursue a claim against the arrangement agent or an MBS underwriter.

Criminal: Congress and the press have recently made strident calls for criminal prosecution of Goldman Sachs. After the failure of EF Hutton, Drexel Burnham, Salomon Brothers, and most recently Arthur Andersen, nobody

1 This Bernstein Equity Research report does not represent, and is not intended to provide, legal advice or opinion and should not be relied on as such.

2 The Section 11 statute of limitations runs from the issuance date of the security. The Section 12 statute of limitations can run the purchase date of the security. We note that there was limited secondary trading of CDOs during the crisis.

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doubts the power of the US Justice Department to punish corporations. However, much has changed at the Justice Department since the Arthur Andersen debacle. Bernstein notes that in 2003, Deputy Attorney General Larry Thompson published "Principles of Federal Prosecution of Business Organizations." This 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. Ultimately, the targeted company is treated not as a hardened criminal but as the equivalent of a juvenile offender that can be reformed.

During the credit crisis of 2007-09, governments learned that there are unforeseen linkages between banks, capital markets and economies and took unprecedented action to save the global financial system. Given the consequences of previous criminal indictments against financial institutions, we believe that officials within the Beltway know that now is not the time to "stress test" the major banks and put the global economy in play with a Goldman Sachs show trial. If an alleged violation is identified during a Goldman investigation, we expect a reasoned response from the Justice Department. In a worst case environment, we would expect a "too big to fail"bank such as Goldman to be offered a Deferred Prosecution Agreement, pay a significant fine and submit to a Federal monitor in lieu of a criminal charge. Consequently, we do not believe that Goldman investors face an"Arthur Andersen" risk. We must conclude that the risk of a criminal charge is so great to a large bank that in order to minimize the possible consequences, assuming an alleged violation is identified, the Justice Department would likely offer a deferred prosecution agreement as an alternative. And if facing the threat of a criminal indictment and a deferred prosecution agreement, any global bank would certainly accept the DPA.

As fundamental analysts, our Outperform rating on Goldman Sachs is based on the continuing earnings power of the GS franchise and the firm's low stock valuation. Since its IPO in 1999, GS shares have traded at a higher Price/Tangible Book Value 96% of the time. There is no empirical evidence that clients are abandoning Goldman or that the franchise has been weakened by the firm's PR and government relations traumas. GS remains the world's leading investment bank. It has maintained its positions as a perennial top three player in announced M&A dealsand equity underwriting and currently is the #1 IPO underwriter in 2011YTD. In addition, despite impending regulation, its trading businesses remain global leaders and we anticipate the firm's FICC franchise will continue to book reasonable performance in Europe and the U.S. over the next 18 months. Furthermore, boasting the largest private equity portfolio of any large capitalization bank, the company has entered the most favorable portion of the economic cycle when its merchant banking business can harvest gains. While the operating environment remains fragile, we believe Goldman Sachs is better positioned to reap the benefits of a global capital markets recovery relative to any of the other players. We continue to rate the stock Outperform.

Investment Conclusion

Investing in Goldman Sachs is not for the faint of heart. Goldman is at the center of the political cyclone coming out of Washington DC and sustained by Middle America's rage against Wall Street. Rolling Stone recently reignited the fury by alleging Goldman Sachs took advantage of its fixed income clients when it sold collateralized debt obligations. The article riled the equity market by calling for criminal action against Goldman executives, alleging that they committed perjury before the Senate Subcommittee. Legal risk has driven the stock to the bottom 4% of its post IPO price on a P/TB basis.

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Exhibit 1GS Stock Price 2010-11

$100$120$140$160$180$200

Pric

e pe

r sh

are

Goldman Sachs Stock Price

Source: Bloomberg

Goldman would certainly prefer to be out of the spotlight. The company's senior management has stated that it wants a normal relationship with its regulators, the press and the public. The company has completed an internal review of its business practices and has made changes in its underwriting and securitization procedures and the firm's management is being ultra vigilant in supervising its business activities. Unfortunately, changing a public persona will take time and this likely means that ambitious regulators or state attorneys will continue to pursue the firm for the foreseeable future. But we do not think that the US Justice Department will be rash in its actions, and we do not believe that there is"Arthur Andersen" risk to this stock.

Outlook for Goldman

Longer term, Bernstein believes that the significantly higher capital charges of Basel III, the prohibition of proprietary trading and the limitation on private equity investing, combined with much lower leverage, will lead Goldman tomodify its business model.

Pro forma sales trading returns on equity are threatened by these regulatory changes. Based on a simple analysis of industry margins, Basel III leverage limits and historic revenue yield on trading inventory, it appears that the large banks will not be able to beat their cost of capital. Trading only generates a 6% to 8% ROE pro forma for Basel III. But this is a naïve analysis and assumes that Wall Street takes no action to offset the new regulations.

We expect Goldman to implement changes within its global fixed income and institutional equities to automate market making activities, reduce staffing on trading floors and shrink overhead to enhance business margins. The balance sheet usage of trading will be tightly constrained3, flow will be pursued in an attempt to provide liquidity with less capital and the turnover rates of inventory will be increased. We note that a 3% reduction in the compensation ratio of its trading business will allow Goldman Sachs to beat its cost of capital in these units under Basel III capital rules.

We anticipate GS' large PE business will evolve into a "KKR-like" model and Goldman's principal investing business will become an asset management business. As a result, the company will invest less of its own capital in private companies and will employ third-party funds as the vehicle for funding merchant banking.

As the principal investing portfolio runs off, associated capital will need to be redeployed. In the place of the principal investing portfolio will likely be a targeted lending book to facilitate client banking transactions and to use to lend to high return projects.

Looking forward, we foresee a “'new”' Goldman Sachs that will remain a powerful global trading house, but with a tightly controlled balance sheet, the firm's trading revenues are expected to grow only with the growth of the global capital markets – historically 7% to 9% for debt markets and 6% to 8% for equity markets4. 3 One impact of this industry wide shift will be wider bid offer spreads in fixed income and higher costs to clients seeking liquidity. One client characterized this as the "democratization" of Basel III. 4 Source for capital markets data is IMF data series for domestic markets.

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Overall, we expect the new environment and the constraints on trading and private equity to reduce the firm's revenue growth rate by one third and depress the average full cycle ROE of the firm to approximately 16% to18%5. While this performance falls short of the long term 20% ROE that Goldman Sachs has achieved since its IPO, Bernstein continues to believe that Goldman Sachs' long-term returns look attractive, and this justifies an outperform rating.

Exhibit 2GS Quarterly EPS 2000-2011

Exhibit 3GS Banking and Trading Trends ($Bln. Except RRONA)

-$6.00

-$4.00

-$2.00

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

GS Quarterly EPS2000 2005 2010

M&A $980.2 #2 $758.7 #1 $553.6 #2

IPO $31.0 #1 $10.8 #4 $17.7 #3

ECM $102.6 #1 $48.9 #2 $68.0 #2

DCM $145.2 #8 $282.7 #10 $262.0 #8

Trading RRONA 3.7% 2.6% 3.5%

Source: Company Disclosure Source: Company Disclosure and Bernstein Analysis

5 Needless to say, these estimates imply that the capital retention rate of Goldman will decline. We therefore expect large buybacks and a higher dividend payout ratio at the new GS.

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Exhibit 4GS P/TBV Stock Valuation History 1999-2011

Exhibit 5GS P/TBV Stock Valuation Metrics

Source: Bloomberg and Bernstein Source: Bloomberg and Bernstein

Details

Goldman Sachs settled a CDO related civil fraud case with the SEC last year for $550 million. Just as we were becoming hopeful that the long-running wave of credit crisis related investigations and the potential litigation bubble might be losing momentum, fear of a criminal action against Goldman Sachs has raised its head again. Using the Senate’s Permanent Subcommittee on Investigations' recent report "Wall Street and the Financial Crisis", a Rolling Stone article reiterated the allegation that Goldman Sachs had taken advantage of its fixed income clients when it sold collateralized debt obligations. The reporter called for criminal action against Goldman executives, alleging that they committed perjury before the Senate Subcommittee. Goldman stock is down 9% since the publication of the article.

Needless to say, there is no shortage of parties to blame for the financial crisis. There are other companies that were larger MBS underwriters and much larger participants in the CDO market than Goldman Sachs. There were the financial regulators who designed the SEC's CSE rules which allowed Wall Street leverage to soar, and the bank regulators who ignored weakening bank lending standards. There were the dishonest mortgage borrowers who lied about income and net worth to qualify for loans, and the mortgage bankers who enabled them. There were the institutional investors that who gorged on CDO and MBS securities in a search for yield. There were the credit rating agencies that never asked themselves if "it might be different this time," and there were the poorly designed government policies that encouraged homeownership for everyone. But, Goldman Sachs has become the poster boy, representing all the causes of the fallout to the press and to the average American.

As the U.S. economy remains under stress, politicians and an irate public are eager to implicate Goldman Sachs for causing the credit crisis and the subsequent sluggishness of the U.S. economy. And as a result, Goldman is currently being investigated by FINRA, Massachusetts State regulators, the Commodity Futures Trading Commission and the U.S. Justice Department and the Securities and Exchange Commission are studying Senate Subcommittee report to determine if there is any new evidence that may justify charges.

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GS Price/TBV Percentile P/TB90% 3.48580% 3.066

P/TB Ratio 70% 2.822Mean 2.497 65% 2.725Stnd Dev 0.908 60% 2.650

55% 2.57950% 2.48540% 2.35930% 2.14920% 1.51915% 1.3965% 1.1794% 1.1533% 1.0452% 0.9961% 0.909

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Losing in the Court of Public Opinion

Wall Street and its stereotypical banker have never been popular with the average American. This crisis has intensifiedthe distrust of bankers by focusing the fierce spotlight of attention on all the warts of the global fixed income market, and "opening the kimono" of the bond market has shocked the public.

To Wall Street and its institutional clients, the various reports that have been published describing OTC derivatives, cash market making, structured products and securitization practices provided few surprises about the rough and tumble world of bond trading. Sophisticated participants have long known that fixed income sales and trading is a zero sum business. In the OTC fixed income market, if one side is buying the other side is selling. The narrow spreads in the most competitive portions of the market long ago forced an evolution of the business model of the banks to a flow trading model where the 'pattern recognition' of customer demand drives risk taking and profitability. In this world, sophisticated clients such as BlackRock, Pimco, Prudential and MetLife have become trading counterparties which can hold their own against the best of Wall Street.

Securities issuance sounds more civilized to the untrained observer than trading – but only slightly. Debt capital market professionals owe a duty of care in the performance of due diligence in order to ensure that the facts disclosed in any underwriting prospectus are true. And investment bankers understand that if their disclosure is incomplete, theirfirm will be sued by investors and an ongoing client relationship could be permanently damaged. Investors recognize that the public disclosure associated with any securities issuance need to be thoroughly analyzed and a credit analysishas to be more than simply a rereading of a rating agency summary. Institutional investors know, through long experience, that if a financial product is being 'manufactured' in a securitization, the goal of a sponsor is to produce the greatest yield using the lowest cost 'ingredients', subject to credit ratings agency standards. Fixed income portfolio managers know that their teams must understand the details of a securitized product or synthetic security to ensure that its returns justify its risks. And investors in private placements understand that it is their responsibility to pursue their own due diligence and by taking on this responsibility the private placement investor expects a higher return.

To most average Americans and many members of Congress, the above revelations sound like the Wild West. Washington has concluded that the abusive practices of the banks and brokers need to be changed. Never mind that most bond market investors were and are QIBs, never mind that the market making obligations of an underwriter can prove very costly during periods of turmoil, never mind that there is no fiduciary duty when traders are dealing with sophisticated institutional clients. Wall Street needed a Sheriff and the result is Dodd-Frank, the Volcker rule, a dead securitization market, timid bank lending and a series of Pecora Commission style reports blaming everything from the financial crisis to global warming on Wall Street bankers.

And with Lehman Brothers and Bear Stearns, the largest MBS underwriters gone, with the largest US CDO player, Merrill Lynch subsumed into Bank of America, with a wounded Morgan Stanley recovering from its near death experience and with the major foreign bank participants in CDOs, RBS, Deutsche and UBS, having been brought to heel by their home regulators, Goldman Sachs, the last man standing, is the target of public wrath.

Unfortunately, Goldman's opaque partnership culture and well-publicized compensation pools has a difficult time defending itself in the court of public opinion. The partnership sounds to the public at best like an elitist cult. The talented teams of high priced lawyers advising the firm have properly instructed Goldman management to answer questions briefly and offer no added commentary when under oath. This may be good legal advice but it is deadly from a public relations point of view. Management has sounded evasive and wooden in the hearings and they have lost the battle of public perception.

The reference of the Subcommittee report to the Justice Department and the SEC will probably delay the firm’s efforts to escape the spotlight. It is likely that the Subcommittee's report of "Wall Street and the Financial Crisis" will complicate Goldman’s defense of various matters discussed in its Forms 10-K for 2010 and Q1 2011 10-Q. It may also result in the filing of additional lawsuits against the firm by private parties. And the report will increase the regulatory burdens on Goldman because the Subcommittee has formally referred its findings to the Justice Department and to the SEC and suggested that Goldman personnel may have perjured themselves.

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GS Litigation Risk –A Quantitative Look

With all these matters facing the firm, we can all be thankful that we are not CFO or CEO of embattled Goldman. Happily, for long-term investors, while the PR tide is certainly moving against the firm, Goldman's potentialquantitative MBS and CDO litigation exposure are not as large as that of its major competitors.

Goldman was never a leading MBS underwriter – and that is certainly good. Based on Dealogic data for 2005-2007, Goldman Sachs had a global market share of 4.8%, having underwritten $203.2 billion during the period. Virtually all of this underwriting volume is outside the three year statute of limitations of traditional underwriters' liability6onlyapproximately 59% of the volume still falls within the five year limit of the Rule 10b-5 fraud section. The leaders inMBS underwriting in the period running up to the global credit crisis were #1 Bank of America ($598.8 billion) which includes the legacy underwriting volumes of Countrywide and Merrill Lynch, JP Morgan Chase ($551.1 billion) which includes Bear Stearns, Barclays Capital ($482.4 billion) which includes Lehman Brothers7 and RBS ($412.1 billion). Goldman was never a major subprime player. In subprime Goldman's market share peaked according to the "Inside B&C Lending" report at #9 behind Lehman Brothers, RBS Greenwich Capital, Credit Suisse, Countrywide Securities (BAC), Morgan Stanley, Bear Stearns (JPM), Merrill Lynch and Citigroup.

Exhibit 6MBS Issuance - GS not a big player

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

Bank of America

JPMorgan Barclays Capital

RBS Deutsche Bank

Credit Suisse

UBS Citi Morgan Stanley

Goldman Sachs

2005-2007 MBS Underwriting$Mln

Source: Dealogic

As MBS underwriting grew in the pre-crisis period, CDO issuance8 expanded in order to provide a permanent home for the new subprime and Alt-A loans being originated by financial institutions. The annual issuance volume of Collateralized Debt Obligations (CDOs) was $33 billion in 1999 and rose to $229 billion in 2006 and was $195 billion

6 We define traditional underwriters' liability litigation as Section 11 or Section 12 claim(s). 7 We note that Barclays did not purchase the broker-dealer of Lehman Brothers in 2008 and thus is not responsible for the legacy underwriters' liability of LEH. 8 The securitization expansion of 2005-2007 allowed banks to clear their balance sheets. By pooling assets and selling the resulting tranches, the banks could reduce capital charges. The follow on CDO efforts of the banks were justified by the transfer and re-engineering of risk. At least in theory, the pooling of low or uncorrelatated assets could decrease risk. This process allowed the institutional investors who purchased the CDOs to gain exposure to tranches of higher yielding AA and AAA rated assets that would have been far too risky to own directly.

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in 2007 before issuance collapsed in the face of the crisis. These CDO issuance volumes raised an estimated $361 billion in new capital for the US mortgage market and generated over $8 billion in investment banking revenues to the CDO promoters.

With its derivatives and structuring expertise, GS was an early entrant to the CDO market. The financial engineering of bundling cash flows into tranches allowed synthetic security desks to create CDO investments with different risk profiles targeting different investor groups.

Exhibit 7CDO Sponsor/Arranger Volumes

-

20,000

40,000

60,000

80,000

100,000

120,000

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160,000

180,000

2000 2001 2002 2003 2004 2005 2006 2007

$, m

illio

ns

CDO Arrangement Volumes

Merrill Lynch

Citi

UBS

Goldman Sachs

Banc of America

Deutsche Bank

RBS

Morgan Stanley

Bear Stearns

Source: Dealogic

During 2005-07, Merrill Lynch was the largest CDO sponsor with over $102 billion in CDO notes issued over that period. This represents an 18.4% market share. Citi has the number two position with $59.3 billion in CDOs and UBS was number three with $44.8 billion in CDOs arranged. Goldman Sachs (#4) underwrote $44.1 billion in CDO over the period 2005-07. Pro forma for the bank acquisitions made during the crisis, Bank of America has the largest exposure with $129.7 billion arranged in 2005-2007.

Notably, GS had the #2 market share in 2006 and #3 in 2005 but pulled back from the CDO market in 2007, dropping to #5 in terms of market share. This means that Goldman's CDO underwriting volume is from an earlier vintage MBS year, which implies higher-quality assets and better relative performance.9 In addition, we should point out that only approximately 68% of the GS volume still falls within the five year statute of limitations of Rule 10b-5 claims compared to approximately 80% for the rest of the top ten CDO arrangers and virtually all of the underwriting is outside the three year statute of limitations on Section11 and Section 12 claims.

9 According to a statistical analysis by Barnett-Hart of Harvard University," …the CDOs of Goldman Sachs consistently outperformed [other banks' CDOs], and are associated with a decrease of 6% in default[s] after controlling for CDO asset and liability characteristics."

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Exhibit 8Historical realized Default Levels on Collateral in CDO

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

1999 2000 2001 2002 2003 2004 2005 2006 2007

Per

cen

t o

f Ass

ets

Historical Realized Default Levelson Collateral in CDOs

Source: "Story of the CDO Market Meltdown" (2009 ) Harvard College, Data from Lehman Live

Exhibit 9CDO Sponsor Market Share

Rank CDO Arranger 2007 Deal

Value Rank

2006 Deal Value

Rank2005 Deal

Value Rank

2005-07 Total

3 Yr Mkt Share

1 Merrill Lynch $32,291 1 $46,631 1 $23,540 1 $102,462 18.4%2 Citi $28,505 3 $18,920 4 $11,873 2 $59,298 10.7%3 UBS $21,151 4 $18,156 9 $5,498 3 $44,804 8.1%4 Wachovia $14,461 7 $13,062 2 $15,346 5 $42,869 7.7%5 Goldman Sachs $11,012 2 $19,352 3 $13,721 4 $44,085 7.9%

6 ABN AMRO $10,849 24 $1,126 38 $301 13 $12,275 2.2%7 Banc of America $8,634 5 $13,448 8 $5,888 6 $27,970 5.0%8 Deutsche Bank $8,231 9 $10,949 5 $6,349 7 $25,529 4.6%9 Lehman Brothers $7,714 13 $5,936 12 $3,350 11 $17,000 3.1%

10 RBS $7,329 14 $5,235 13 $2,837 12 $15,401 2.8%

11 Morgan Stanley $6,277 11 $8,737 7 $6,205 10 $21,218 3.8%12 Bear Stearns $5,190 8 $12,265 6 $6,301 8 $23,756 4.3%13 JP Morgan $4,977 10 $8,891 15 $1,820 14 $15,688 2.8%14 Credit Suisse $4,830 6 $13,393 10 $5,463 9 $23,686 4.3%15 Fortis $2,972 16 $3,843 35 $331 15 $7,146 1.3%

16 SG $2,859 18 $2,502 26 $513 17 $5,873 1.1%17 Calyon $2,579 12 $6,098 11 $4,250 16 $12,927 2.3%18 UniCredit Group $2,024 20 $2,024 0.4%19 Dresdner Kleinwort $2,000 23 $817 19 $2,817 0.5%20 KBC $1,928 22 $1,288 16 $1,286 18 $4,502 0.8%

Subtotal $185,812 $209,831 $115,688 $511,330 Others $9,476 $19,253 $16,059 $44,788Total $195,288 $229,083 $131,747 $556,119

Source: Dealogic

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Civil Claims and Potential Claims against Goldman

But quantitative facts about past league table market shares and the equity market's perception of legal risk are not the same thing. The well publicized Senate report concluded that Goldman engaged in numerous conflicts of interestduring the crisis. The Subcommittee focused on four CDOs referencing mortgage-backed securities that Goldman privately placed during 2006 and 2007; Hudson Mezzanine 2006-1, Anderson Mezzanine 2007-1, Abacus 2007-AC1 and Timberwolf I. In each case other than Abacus, Goldman took all or some of the short side of the transaction. In Abacus, which was the subject of an SEC enforcement proceeding which Goldman settled by paying a penalty and disgorgement of $550 million, Goldman created the CDO structure to facilitate the efforts of Paulson & Company to short subprime mortgage-backed securities.

According to the Subcommittee report, Goldman owed a duty to its customers to recommend only suitable investments, which it failed to comply with in connection with the marketing of the four CDOs. It also allegedly failed to disclose the existence of its interests to those customers as well as the specific nature of those interests. And Goldman allegedly engaged in a number of other deceptive practices. While these claims made good headlines, theSubcommittee’s analysis differs from the legal rules that apply to private placements sold to sophisticated institutional investors and to secondary market trading activities in the institutional securities marketplace.

The conclusions made by the Subcommittee likely partially stem from a tactical error made by Goldman in overly stressing its role as a market maker before the Subcommittee. Goldman emphasized that it was acting as a principal merely in response to trading initiated by its clients. By doing so it was taking the position that it was simply facilitating the demands of its clients. As a true agency trader in equities, this would be perfectly true statement but in fact, Goldman made at least two significant directional bets to short the subprime mortgage-backed securities market in 2007 and was generally short mortgage-backed securities during that year. Bernstein recognizes that taking or retaining risk on a trading desk is entirely legal as a fixed income market maker but to a politician this sounded like the firm was misleading naïve clients.

Moreover the documents submitted by Goldman showed that the same desks that facilitated customer trade flow activity and suffered major losses on their long positions were also net short the market to an extent that allowed Goldman to offset the losses on its long positions and earn a profit10 from its mortgage-backed trading activities during 2007. This likely led the committee to question the veracity of Goldman's testimony.

It is also fairly clear that Goldman was eager during the latter part of 2006 and early 2007 to pare down its long subprime mortgage-backed securities positions and that it did so by disposing of those positions outright or hedging out the long market exposure. And Goldman used certain of its CDO activities to accomplish those objectives11.

While there were instances where Goldman expanded its sales efforts for the CDOs beyond the standard group of customers for the product, it appears that in most instances Goldman's fixed income desks were dealing with sophisticated institutional clients who made their own, independent investment decisions and had a different view of the market. Nonetheless, the Subcommittee accused Goldman of deliberately designing products that were intended to fail and that allowed the firm and one of its favored clients to profit by betting against those products to the detriment of its clients to whom it recommended and sold the unsuitable investments.

From Goldman's point of view it had fulfilled its suitability obligations to its institutional clients by making a reasonable determination that these clients were capable of evaluating the risk inherent in the transaction independently and that, in fact, they exercised independent judgment in assessing that risk. This defense will also allow Goldman to contest in a court of law, the Subcommittee’s assertion that, having recommended a transaction, Goldman was obligated to disclose to its clients that it had an interest in the transactions that was materially adverse to

10 Given the cross hedging and changing correlation of asset classes during the crisis the Subcommittee’s quantitative efforts to calculate the actual amount of Goldman’s profits during that year are probably debatable.11 It is ironic that events that demonstrate that Goldman called the subprime mortgage market much more accurately and managed its risks far better than any of its competitors have caused it to become defensive about its considerable accomplishments. Although not a focus of the Subcommittee and doubtlessly an unintended byproduct, the report and its voluminous exhibits depict personnel at all levels of the firm from the desk through divisional leadership to senior management paying rigorous attention to the management of risk.

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theirs in that it intended to take a short interest of, respectively, 100%, 40% and 36% in the Hudson, Andersen and Timberwolf securities that they were purchasing.

Moreover, by the very nature of the CDO transactions, the purchasers of the securities who were taking the long side of the transaction knew that another investor with a different market view would be taking the short side of the transaction. And Goldman disclosed that conflicts of interest between it and the investors in the CDOs could arise because it reserved the right to deal in the underlying securities, the reference securities or other interests in the securities that comprised the CDOs. The Subcommittee opined that these disclosures were inadequate, particularly where Goldman had already decided to take a short interest in the transaction.

The Subcommittee also concluded that it was misleading for Goldman to state that its interests were “aligned” with the investors in the Hudson, Andersen and Timberlake CDOs because it was taking a portion of the equity tranche while, at the same time, it intended to take a substantial short position in connection with the CDOs.12 This allegation may prove more difficult to defend. But there may have been other disclosures to or understandings by prospective investors that amplified Goldman’s intentions.

There are two additional matters to which the Subcommittee devoted significant attention. First, the Subcommitteeconcludes that a conflict of interest was created by Goldman’s dual roles as the holder of the short interest in the Hudson CDO and as the liquidation agent. As the liquidation agent, Goldman was responsible for closing out a credit default swap positions once the underlying reference asset suffered a credit event and became a so-called credit risk asset. However, according to the Subcommittee, it was in Goldman’s interest as the holder of the short interest in the swap to delay its termination as long as possible because the position became increasingly valuable as the market for subprime mortgage-backed securities declined during the summer and fall of 2007.

It is obviously impossible to discern the actual motives of Goldman’s personnel from the exhibits cited in the Subcommittee report. We note that the governing Liquidation Agency Agreement was ambiguous on its face. It provided that GS, as the Hudson liquidation agent, had no right to exercise discretion in connection with the termination of a credit default swap transaction related to an underlying CDO obligation that had become a credit risk obligation. However, it also provided Goldman with a 12-month period to close out the positions related to the CDS.

In correspondence with Goldman, Morgan Stanley’s counsel argued that Goldman had no right to delay the closing out of the collateral default swaps for five months, and that the delay caused the firm to suffer an additional loss of $150 million.13 Goldman’s lawyer responded that the 12-month provision allowed it to “work” the position in anticipation of a rebound in the subprime mortgage-backed securities market in order to satisfy its obligation of “best execution.” In any event, it appears that Goldman accelerated its efforts to close out the swaps soon after this correspondence.

It also seems possible that the delay may have been caused because the liquidation was assigned to a Goldman trader isolated from the main trading desk who believed in good faith that market prices would improve. There are several exhibits that suggest that Goldman was uncomfortable with its role as liquidation agent and considered transferring the function to a third party which had more relevant experience, which might be able to attract better bids from the Street and which might be able to persuade the affected parties that it would be advantageous to delay the termination of the collateral default swaps and to make the termination process more flexible.

Second, the Subcommittee concluded that there was a conflict of interest between Goldman Sachs in its role as the collateral put provider in Timberwolf and the investors on the long side of the transaction. However, it is unclear to what extent those investors may have been damaged by Goldman’s conduct.

According to the Subcommittee, a portion of the funds provided by the purchasers of Timberwolf’s securities were invested in default swap collateral securities for the purpose of paying investors on the short side of the transaction if the CDO performed poorly. Also according to the Subcommittee, these securities were usually of high quality and liquid, and provided an important source of income for the CDO. In the event that payments were due to investors on

12 Although not a defense, it is interesting to note that, according to the Subcommittee, Goldman actually was only able to sell one-third of the Anderson CDO and suffered a loss of $307 million and that, net of the gains on its short position in Timberwolf, it suffered a loss of $455 million.13 According to the Subcommittee, Morgan Stanley suffered an eventual loss in excess of $930 million in connection with the Hudson transaction.

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the short side of the transaction, they would be made using cash and securities in the default swap collateral account. As Goldman was guaranteeing the par value of the default swap collateral securities in connection with the CDO transaction, it retained the right to consent to the selection of replacement collateral. However, for a period during 2007, purportedly to protect itself against risk of loss in the value of the default swap collateral and despite the protestsof the third party collateral manager, Goldman refused to allow collateral to be replaced. According to the Subcommittee, the retention of cash in the default swap collateral account resulted in a lower yield than could have been obtained by reinvesting the funds in securities and thus disadvantaged the long investors in the CDO.

The Subcommittee also accuses Goldman of using the Hudson CDO to transfer its long ABX asset risk to its clients. However, it seems reasonable to assume that Goldman’s investment decision was not relevant to any, or to only a very few, of the institutional investors, including Morgan Stanley, which took the long side of the transaction based on their own, different market view.

In connection with the Anderson CDO, the Subcommittee charges Goldman with utilizing securities from its warehouse account that it knew were declining in value. However, every potential investor was also fully aware of current market conditions when Anderson’s securities were offered. And, in any event, many prospective investors obviously had enough information to make an informed decision because Goldman was only able to sell $102 million of the $305 million issue.

But the claims of the Senate report are only part of the litigation issues overhanging Goldman Sachs. In its 2010 Form 10-K and 2011 1Q Form 10-Q, Goldman is required to identify all material legal proceedings facing the company and disclose the cost of potential legal losses above their current litigation reserve. In Goldman's recent 10-Q the firm estimated that the "upper end" of the range of potential losses was approximately $2.7 billion at March 31, 2011 versus $3.4 billion at December 31, 2010. This represents a worst case charge of 3.7% of equity capital14.

Residential Mortgage Origination Claims. Given the breadth of the potential problems, Goldman states that it cannot predict its potential exposure to residential mortgages with certainty. It points out that during the period from 2005 through 2008, it sold approximately $10 billion of loans to government-sponsored enterprises and approximately $11 billion of loans to other third parties. Goldman notes that from 2005 through 2008 it transferred loans to trusts and other mortgage securitization vehicles. As of March 2011, the outstanding balance of those loans was approximately $47 billion, which reflects pay downs and cumulative losses in the total amount of $78 billion (of which $15 billion are cumulative losses). Goldman also notes that it generally made loan level representation15 in connection with the sale or securitization of these loans. These related to (1) the borrower’s financial status, (2) loan-to-value ratios, (3) the occupancy status and other features of the property, (4) the lien position and (5) compliance with legal and documentation requirements. During 2010 the firm realized a loss on the repurchase of less than $50 million of loans and during the first quarter of 2011 it realized a loss on the repurchase of less than $10 million of loans.

Goldman states that future repurchase claims will depend on a number of factors, including whether it or the third parties from which it purchased loans actually made material misrepresentation or omissions; whether the firm can be held liable for material misrepresentation or omissions made by third parties and, if so, whether it can recover any 14 Of course, investors do not know what a worst case scenario means to Goldman Sachs or to its competitors, but we can compare the disclosures of each bank. J.P. Morgan Chase disclosed that in its version of a worst case environment, the bank has potentially $4.5 billion in legal charges above its current litigation reserves. Citigroup’s worst case litigation scenario would cost $4 billion. Bank of America disclosed up to $1.5 billion in additional costs in its worst case. Wells Fargo disclosed potentially $1.5 billion in cost above current reserves. For the major banks then, a worst case event means litigation charges that could total from one to four percent of capital. The reason these worst case scenarios look so manageable is that to date the legal claims against MBS underwriters and CDO arrangements have not been notably successful.15 In the mortgage origination cases, Goldman faces claims from purchasers of mortgage-backed securities who assert that the underlying loans that were packaged in securitizations did not comply with representations and warranties relating to characteristics and credit quality. There has been a great deal of publicity describing the efforts by these plaintiffs to obtain access to loan files that would allow them to proves the merits of their claims. It is not yet clear ifthis demand for information will be successful and if it is successful is it possible for the loan files to be analyzed by a plaintiff on a cost effective basis.

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losses from those third parties; macro-economic developments such as price trends in the housing market; and legal and regulatory developments. Goldman notes that the current large number of residential mortgage defaults may lead to an increase of repurchase claims, but that the situation is too uncertain for it to make a meaningful estimate of its potential exposure.

CDO Litigation. Goldman discloses that it has been sued in the Supreme Court of the State of New York in New York County by ACA Financial Guaranty Corporation in connection with the ABACUS 2007-AC1 transaction. As previously noted, the firm settled an enforcement action brought by the SEC last summer by paying $550 million in penalties and disgorgement. As part of that settlement, Goldman conceded, without admitting or denying wrongdoing, that its marketing materials for the Abacus CDO had been incomplete. In particular, it was a “mistake” for Goldman to state that the reference portfolio was selected by ACA Management, a wholly-owned subsidiary of ACA, without disclosing the role of Paulson & Co. in the portfolio selection process and that Paulson’s interests were adverse to those of the investors.

ACA is seeking compensatory damages of $30 million, punitive damages of $90 million and an unspecified amount by which Goldman is alleged to have been unjustly enriched. ACA alleges that Goldman obtained its agreement to insure the super senior tranche of the CDO by fraudulently misrepresenting that Paulson & Co. was the equity investor in the CDO and by concealing that Paulson & Co. was taking the short side of the transaction. ACA had insured the super senior tranche up to $909 million. The risk of ACA’s default was assumed by ABN AMRO. That commitment was ultimately unwound by a payment of $840,909,090. In connection with that payment, ACA was required to pay ABN AMRO $15 million and Surplus Notes in an unspecified amount.

However, based on public information there is considerable dispute over what ACA Management actually knew about Paulson & Co.’s role in the transaction. Representatives of both Paulson & Co. and Goldman have stated that ACA Management was told that Paulson & Co. would be taking at least some of the short position in the Abacus CDO. And there is also a factual issue as to whether ACA Management’s personnel knew that Paulson & Co. was not, in fact, making an equity investment in the Abacus CDO, or at least should have inquired more diligently to resolve any uncertainty that they may have had. In any event, as the SEC settlement is couched in terms of “mistake,” it suggests only that Goldman was negligent. Thus, it will not prejudice Goldman’s ability to contest the claims that it committed fraud, which requires a much more rigorous standard of proof.

Several purported class actions have also been brought against Goldman and certain of its officers and employees in the United State District Court for the Southern District of New York alleging that its disclosures related to its CDO business and the SEC investigation that led to the ABACUS 2007-AC1 settlement were inadequate. These lawsuits generally allege violations of sections 10(b) and 20 of the Securities Exchange Act of 1934. Section 10(b) is the basic fraud provision of the federal securities laws that private litigants can rely on and section 20 imposes liability on persons who control the wrongdoer. It seems unlikely that plaintiffs in these lawsuits will be able to meet the standard of proof of deliberate wrongdoing that is required to establish a section 10(b) claim16.

A purported class action was also filed in the United States District Court for the Southern District of New York against Goldman and two former employees on behalf of purchasers of notes issued in 2006 and 2007 by two synthetic CDOS named Hudson Mezzanine 2006-1 and Hudson Mezzanine 2006-2. Goldman has made a motion to dismiss the amended complaint, which asserts violations of federal securities laws and common law claims and seeks unspecified compensatory, punitive and other damages.

MBS/ABS Litigation Goldman and three current or former employees are defendants in a purported class action brought in the United States District Court for the Southern District of New York on behalf of purchasers of various mortgage pass-through certificates and asset-backed certificates issued by various securitization trusts in 2007 and underwritten by the firm. The complaint alleges that the registration statement and the prospectus supplements violated various provisions of the federal securities laws and seeks unspecified compensatory damages and rescission or rescissionary damages. After a fairly tangled procedural history, plaintiff’s remaining claims that the registration 16 In this context, it should be noted that the SEC’s complaint in the Abacus matter was focused on a single transaction and did not assert generally that Goldman’s activities in the CDO market were fraudulent; and a securities firm is generally not obligated to disclose the mere existence of a regulatory investigation, of which many are usually ongoing at any one time and most of which are resolved without any adverse consequences or the imposition of any material penalty.

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statement and prospectus supplements for two offerings of certificates violated sections 11 and 12 of the Securities Act were dismissed. The plaintiff apparently intends to appeal from that decision.

A substantially similar purported class action has been brought in connection with an additional offering under the 2007 registration statement. Goldman states that the securitization trusts issued and it underwrote certificates in the principal amount of approximately $785 million to all purchasers in the offerings at issue in the “complaint,” excluding those offerings for which the claims have been dismissed. It is not clear exactly what this language means, but it seems to refer to claims relating to pass-through certificates and asset-backed certificates issued during 2007 that have not yet been finally resolved.

Goldman and three current or former employees are among the defendants in a separate, purported class action brought in the United States District Court for the Southern District of New York on behalf of purchasers of various mortgage pass-through certificates and asset-backed certificates issued by various securitization trusts in 2006 and underwritten by the firm. According to Goldman, the second amended complaint alleges that the registration statement and prospectus supplements for the certificates violated various provisions of the federal securities laws and seeks compensatory and rescissionary damages of unspecified amounts. Goldman has succeeded in having the second amended complaint dismissed except as to one offering in which the plaintiff claims to have purchased securities. The firm underwrote securities in the principal amount of approximately $698 million in the offerings at issue, excluding those for which the claims have been dismissed.

Goldman also discloses that various purchasers and counterparties in transactions involving mortgage pass-through certificates, CDOs and other mortgage-related products have brought lawsuits in state and federal courts that generally allege the offering documents for the securities they purchased contained material misstatements and material omissions and seek rescission and damages. Goldman estimates that the plaintiffs in active cases who are seeking the remedy of rescission suffered losses in the amount of $514 million as of March 2011. In addition, Goldman has also entered into so-called “tolling” agreements, which suspend the running of statutes of limitations, with a number of other entities that have threatened to assert claims against it in connection with offerings of mortgage-related securities.

Goldman also notes that it is a defendant in an action brought by the City of Cleveland in the United States District Court for the Northern District of Ohio seeking, among other things, compensatory damages and alleging that defendants’ securitizations of mortgage-backed securities created a “public nuisance” in Cleveland. The lawsuit was dismissed by the District Court. That decision was affirmed by the United States Court of Appeals for the Sixth Circuit and was not accepted for review by the United States Supreme Court.

Shareholder Derivatives Claims. Goldman’s shareholders have brought several so-called derivative lawsuits against the firm, its board of directors and some of its officers and employees in the Supreme Court of the State of New York in New York County and the United States District Court for the Southern District of New York. These lawsuits assert claims in connection with mortgage-related matters between 2004 and 2007, including the ABACUS 2007-AC1 transaction and other CDO offerings. The complaints generally allege various breaches of duty, abuses of authority and securities law violations on the part of Goldman’s management in connection with these transactions. The complaints seek, among other things, damages, restitution and corporate governance reforms. While it is not possible to predict the outcome of this litigation with any certainty, it should be noted that derivative lawsuits brought by disaffected shareholders generally fail.

WAMU Litigation. Goldman was among the underwriters for Washington Mutual who were named as defendants in a purported class action brought in the United States District Court for the Western District of Washington. Plaintiffs alleged that the offering documents failed to describe Washington Mutual’s mortgage-related activities accurately in violation of federal securities laws. The firm underwrote Washington Mutual securities in the principal amount of approximately $520 million, excluding those offerings for which claims were dismissed in the course of the litigation. The parties have reached an agreement in principle to settle the litigation. Goldman is expected to contribute an undisclosed amount to the settlement, for which it is fully reserved.

IndyMac Litigation. Goldman is also among the underwriters of pass-through certificates for affiliates of IndyMac Bancorp which were named as defendants in a purported class action brought in the United States District Court for the Southern District of New York. Plaintiffs allege that the offering documents for the securitizations violated the disclosure requirements of federal securities laws. During June, 2010, the court dismissed all of the claims relating to offerings in which no named plaintiff had purchased certificates, which included every offering underwritten by

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Goldman. Four other investors are seeking to intervene in the lawsuit in order to assert claims based on additional offerings, including two underwritten by Goldman. Goldman underwrote securities in the principal amount of $751 million in connection with those two offerings.

Other Litigation. Goldman also notes that it has received numerous inquiries from regulators (apparently including the Justice Department) relating to its mortgage-related securitization process, synthetic mortgage-related products and its mortgage foreclosure and servicing activities. and Goldman states that it expects to be the subject of additional shareholder derivative claims, class action claims, rescission and “put back” claims as well as other litigation and regulatory proceedings arising from its mortgage-related offerings, loan sales, CDOs, mortgage servicing and foreclosure activities.

Goldman's Defenses – Underwriter's Liability17 in MBS

Normally, following a default of a bond that was sold in an SEC-registered offering, investors' claims are made under Sections 11 and/or 12(a)(2) of the Securities Act of 193318.This is a plaintiff friendly legal framework. Underwriters owe a “rigorous” duty of care in the performance of due diligence in order to ensure that the facts in the prospectus were true before selling investments to the public. Bernstein noted that MBS underwriters typically hire collateral appraisers to perform due diligence related to the mortgages underlying the securitization. In this due diligence process, these firms are supposed to review the notes, the titles and mortgage credit insurance policies to make property appraisals. But hiring a due diligence firm does not relieve an underwriter of its liability and doesn't make underwriters immune from the potential underperformance of the collateral pool.

Under the '33 Act, existence of a material misrepresentation or omission is sufficient to establish a prima facie case under Section 11. A plaintiff asserting such a claim does not need to allege its reliance on the disclosure document, nor that the material misrepresentation or omissions caused its loss, nor that the defendant intended to deceive. The material error simply has to exist in the disclosure. But if an underwriter's legal defense team can show that the decline in the value of the securities was due to a change in market conditions such as the credit crisis of 2007-2009, there will be no damages19 awarded to the plaintiff.

The errors and omissions claims of Sections 11 and 12 are much easier to establish than fraud claims under Rule 10b-5 or common law fraud claims. Unless an underwriter can establish that, having conducted due diligence, it had a reasonable basis to believe the statements in the registration statement were accurate, a purchaser of the bonds can recover damages resulting from the decline in the value of the securities resulting from the alleged misstatement or omission in the registration statement.

Damages are measured as the price at which the securities were purchased by the plaintiff (not to exceed the price at which the securities were offered to the public) less (i) the price at which the securities were sold by the plaintiff (if the securities were sold before the lawsuit was filed), (ii) the price as of the date the lawsuit was filed (if the securities are still held by the plaintiff as of that date), or (iii) the price at which the securities were sold by the plaintiff after thelawsuit was filed (if the resulting damages are less than as calculated at the date the lawsuit was filed).

Based on data from the academic research of Bajaj, Mazumdar and Sarin regarding securities-related lawsuits and settlements, we note that the probability of a settlement in a securities-related lawsuit brought in federal court is approximately 56% and that the average Federal securities related lawsuit is settled in approximately four years. Bajaj, Mazumdar and Sarin's research presents average settlements for different types of securities claims ranging from 14%

17 We note that a Section 11 or a Section 12 claim can be brought against more parties than simply an underwriter. 18 A Section 11 or a Section 12(a)(2) claim requires that actions must be brought within one year “after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence." In the case of Section 11 the claim must be made no later than three years after the security was issued. The language of section 12 is capable of being read to allow application of the remedy in an aftermarket context and as a result the statute of limitations can be interpreted to mean three years from the date of a trade in which a prospectus or oral communication contained a false or misleading statement of a material fact.19 We note that many underwriters' liability claims related to the bursting of the 2000-01 technology bubble were ultimately defeated on this issue.

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(Failure to Disclose Claims) to 25% (Fiduciary Claims) of the claimed. The mean settlement for a typical underwriters' liability case is 18.4% of the claimed loss.

Given these well known settlement statistics, institutional investors in problem MBS securities have brought underwriter liability claims against GS claiming that there was misleading statements in the MBS registration statements. These claims have focus on the mortgage underwriting quality of the MBS, the loan documentation of the mortgage portfolio, the credit standards of the portfolio and inappropriate pricing of the RMBS tranches. These claims and cases will be settled in over the next three years.

The obvious defense that underwriters have used – “the due diligence was ok” – is unlikely to completely carry the day, and plaintiffs are going to use the 20:20 vision of hindsight to add doubt about the underwriters’ due diligence efforts. Moreover, the thorny questions as to whether an underwriter’s due diligence was sufficient are less likely to be resolved at the pre-trial stage of litigation, thereby increasing the leverage that plaintiffs will have in forcing asettlement offer from Goldman through the threat of an unpredictable trial.

CDO Claims Are More Easily Defended

CDOs were virtually never issued as SEC-registered securities. CDO notes were distributed to institutional investors under Rule 144A – a private placement exemption20. To buy a CDO note, the investors must have been a “qualified institutional buyers” (QIBs) such as pension plans, hedge funds, investment banks, and government entities. The Section 11 and 12(a)(2) claims described above are not available to investors in a private placement. This means that the QIBs that invested in unregistered CDOs are not able to assert claims on these grounds.

Despite the unavailability of those claims under the Securities Act of 1933, CDO investors have other possible theories for bringing claims against CDO issuers. In a private placement, the CDO issuer will typically make disclosures regarding the terms and conditions and the risk factors relating to the offering in an "Offering Memorandum". While a valid private placement is exempt from the registration provisions of the 1933 Act, the disclosures within a CDO Subscription Agreement or a CDO Offering Memorandum remain subject to the anti-fraud provisions. They may also be subject common law fraud and negligent material misrepresentation or omissions .

Plaintiffs have attempted to use the discovery process to examine many factual issues in a search for a 'smoking gun'; (1) Was the CDO’s portfolio managed in accordance with its investment guidelines? (2) During the marketing effort of the CDO, did the sponsor have a negative opinion of the securities that were going to make up the CDO portfolio asset pool? (2) Did the CDO sponsor 'manage' the mark to market values on the CDO's portfolio to either accelerate or to delay a covenant default? 21 (3) Did the CDO sponsor invest in the senior tranche position in the CDO and use the veto power inherent in that senior tranche to the detriment of the other CDO note holders? (4) Did the CDO sponsor knowingly sell poor quality subprime mortgages at inflated values to the CDO? (5) Did the sponsor entered into derivative trades with the CDO on non-commercial terms? (6) Did the CDO manager promptly disclose declines in the portfolio assets to investors?

If plaintiffs can prove that CDO disclosures are materially misleading, then the sponsor may have violated the anti-fraud provisions of the federal securities laws. But, given the unexpected severity of the crisis, Bernstein notes that it has proved to be very challenging for plaintiffs to argue that the CDO documents contained intentionally misleading statements or omissions that actually led to the losses.

Since purchasers of CDOs are sophisticated investors, as a group they have had difficult time prevailing on a direct fraud claim against a sponsor firm. The defendants have pointed to the fact that the purchasing institutional investorhad the responsibility to perform its own due diligence on the CDO. The defending sponsor firms facing fraud claimshave asserted that the lacked ill intent and that, in any event, any material misrepresentation or omissions identified in

20 Private placements are made under an exemption from registration with the SEC under the 1933 Securities Act. They may be issued under Section 4(2) of the 1933 Securities Act or under certain SEC Regulations (including Rule 144A) which set forth requirements for the exemption from registration.21 In many cases the decision to liquidate CDOs in default is being made by sponsors that also own the senior tranche of notes. It has been alleged that the sponsors are operating to minimize their potential losses at the expense the investors to whom they sold the CDO tranches. This is leading to litigation among investor groups and between investors and the CDO trustee.

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the CDO marketing documents were not the actual cause of the purchaser’s loss, rather the loss caused by the unprecedented decline in home values and the freezing of liquidity in the CDO marketplace.

Bernstein's Bottom Line on Civil Risk

The potential civil litigation issues facing Goldman Sachs are far less than those being navigated by much larger commercial banks such as Bank of America, JP Morgan Chase and Wells Fargo that have far more exposure to the national housing crisis as mortgage loan originators, underwriters of asset backed securities, mortgage servicers and as relatively recent acquirers of large troubled players in the subprime mortgage origination market. In Goldman's recent 10-Q the firm estimated that the "upper end" of the range of potential losses was approximately $2.7 billion at March 31, 2011. This represents a worst case charge of 3.7% of equity. But Goldman has noted that this estimate is far from certain due to the complexity of the legal issues, the bankruptcy of numerous important market players which are no longer in a position to share potential liability, the inability to predict whether various parties who are conducting negotiations with Goldman will proceed with litigation or will settle.

Although there are still many civil claims still to address, Goldman's defense of CDO and MBS related litigation to date has been relatively successful with several of the potential class action cases either having been dismissed or the class size reduced. Bernstein believes that Goldman has strong defenses against a substantial portion of its outstanding civil claims. We note four lines of defense available to Goldman; unprecedented market events and not disclosure caused losses, the statute of limitations has largely run, the named plaintiff does not have standing to sue22 and there was no intention to deceive. At this point Bernstein believes that GS' civil litigation will be manageable from an earnings point of view. The extraordinary level of outside counsel legal fees, which totaled $434 million during 2010 and in-house legal expenses of $292 million are likely to continue through 2013 and we expect the firm to build legal reserves over the next 30 months as the litigation bubble of 2007-2009 winds down.

Criminal Prosecution

"Grovel!"

Shearman and Sterling Partner concerning Negotiation Tactics with the Government. (2005)

Bernstein believes that Goldman's potential civil liability is reasonable as disclosed, but more important the firm's legal defenses appear strong. We are, however, concerned about Goldman and its stock if the US Government decides to pursue criminal action against the firm as a cause célèbre. Criminal investigations are not to be ignored. Investors remember that criminal investigations led to the demise, sale or franchise loss of EF Hutton, Drexel Burnham Lambert, Salomon Brothers, Daiwa Bank and Arthur Andersen.

In 1985, EF Hutton pleaded guilty to 2,000 felony counts of mail and wire fraud related to the firm's cash management policy of depositing checks written out of area banks in disbursement accounts at local banks in order to profit from the cash float. Hutton agreed to pay a $2 million fine and established a restitution fund of $8 million to repay the lost net interest. Less than three years later, Hutton faced a funding run during the Crash of 1987 and was forced into a 'fire sale' merger.

In 1988, Drexel Burnham Lambert pled guilty to six felony counts, and paid $650 million in penalties. Client confidence in the firm sharply declined and as a result banking revenue and trading performance fell. In late 1989 the firm faced a liquidity crisis and was forced to declare bankruptcy in early 1990.

In 1992, Salomon Brothers settled charges with the SEC and the Justice Department that it broke rules designed to stop a single bidder from dominating the Treasury market by submitting false bids in U.S. Treasury auctions. The cost of the settlement was $290 million. The responsible trader pled guilty to two felonies. The three most senior officials of the firm - chairman, vice chairman, and president - all resigned as part of the agreement. In the year leading up to the settlement, SB faced a 'funding run' and had to implement its contingency funding plan to survive. Within several years, the weakened Salomon Brothers lost its independence and was merged with Smith Barney, sold to Travelers Group and merged into Citicorp.

22 The multiple tranches of a typical MBS or CDO make it difficult to establish a class designation unless an aggrieved party can be identified in each tranche.

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Daiwa Bank settled multiple criminal charges with the Justice Department and paid a $340 million fine. The bank'strading unit in the USA had hidden losses over several years. After becoming aware of the disclosure and reporting problem, Daiwa senior management delayed announcing the matter. The Justice Department claimed that Daiwa was criminally liable for knowledge of a crime. As part of the settlement the Federal Reserve pulled Dawai's USbank charter forcing it to shut down its US operations.

The Justice Department indicted Enron's outside auditor Arthur Andersen for obstruction of justice, Andersen was convicted23 and the company gave up its CPA licenses and the firm effectively ceased its audit practice.

But truly complex criminal cases are not a certain win for prosecutors. A Federal prosecutor has to prove that there was a "criminal intent" to win a complex criminal case. That means that the prosecution must show that the defendantsknew actions were unlawful. Juries, which are instructed that proof must be "beyond reasonable doubt" and have been brought up on TV legal dramas, are always expecting to see indisputable evidence of guilt. If this is not provided at the trial, the jury is disappointed. And this fact means that it is not uncommon for financial cases24 to be dropped because the prosecutor has no "smoking gun" to anchor the case.

This fact likely explains the calls for perjury indictments against GS management from the Senate. Perjury is a relatively easy case to win and as Professor Oesterle of Ohio State University Law School stated in his research25

"…investigations [of complex matters] … often uncover several smaller violations committed by the targets of the inquiry. These violations of tax law or document retention are sideshows to the main scandal… but [these are] discrete acts and easy to prove at trial. Prosecutors can get immediate results at little cost and low risk and attack the targets of the public's anger to boot."

In discussing the techniques used on criminal prosecution of white collar violations Oesterle noted that … types of charges prosecutors use have blossomed from tax evasion to, … mail and wire fraud, stock parking and other technical disclosure violations, money laundering, and, the new favorite, obstruction of justice …." The bottom line is that in pursuit of white-collar prosecutions there has been a clear trend to criminalize conduct that previously had been treated as a civil violation through these techniques. For Goldman's investors, it is important to realize that even a relatively weak securities related civil investigation, (such as Abacus26) can potentially turn to criminal action against an executive if, in the course of the investigation, a violation is found.

Let's Hope Justice Remembers Lehman Brothers

But indicting a "too big to fail" financial institution, like Goldman Sachs, is a dangerous undertaking since it will likely set off another flight to quality and concern about counter party risk much like we experienced in the days following Lehman's filing.

Lehman Brothers filed for bankruptcy on September 15, 2008. After US officials "saved"27 Bear Stearns, the surprise of the Lehman filing, combined with the uncertainty about which banks and investors had large exposures to Lehman Brothers, set off a global bank run. Commercial paper did not roll, institutional investors sold back bank debt to the issuing firm, institutional counterparties that had advanced funding to other financial institutions through the repo market demanded wider collateral haircuts and more conservative marks of the collateral, and some asset classes such as leveraged loans, high yield and MBS were unacceptable to repo counterparties at any price.

23 The conviction was overturned at the US Supreme Court but it was too late to resurrect the Andersen partnership.24 Bernstein would argue that a fraud case against a CDO arranger or MBS underwriter would likely meet this standard. 25 Early Observations on the Prosecutions of the Business Scandals of 2002-03: On Sideshow Prosecutions, Spitzer's Clash with Donaldson over Turf, the Choice of Civil or Criminal Actions, and the Tough Tactic of Coerced Cooperation, Ohio St. Journal of Criminal Law. Dale A. Oesterle26 Bernstein notes that an Abacus CDO investigation was initiated by the Justice Department. To date no action has been taken against Goldman in this matter by the DOJ.27 This of course is a relative term.

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Credit staffs of banks immediately went into action to limit daylight settlement exposure. FX trading and large portions of the bond market experienced sharp declines in activity as participants reduced their settlement. Only DVP trades continued unconstrained. As a result non-US banks around the world found themselves unable to convert local currencies into dollars in order to fund their dollar balance sheet and trade fails increased, further adding to the panic in the capital markets.

This led to a crisis in the interbank market. Libor-OIS spreads jumped after Lehman failed. With the leverageability of capital markets assets falling and interbank funding drying up, banks were forced to sell inventory into a falling, "one way" market and due to “mark-to-market” accounting the major financial services firms took massive losses. To retain liquidity as the markets froze and third party funding evaporated, bank lending activity was curtailed and corporate treasurers lost access to their uncommitted credit lines.

The crisis only ended when the US Treasury and the Federal Reserve and Congress the major central banks around the world and their respective governments established funding vehicles to back up the commercial banks and enforced a recapitalization of the entire financial services sector. In time, this re-established confidence and the markets re-normalized. As part of this unprecedented coordinated global response, government officials learned from Lehman Brothers' bankruptcy that there unforeseen linkages between banks, markets and economies and even the smartest people at the Federal Reserve, at the US Treasury, the ECB, BOE or the BOJ cannot estimate what exactly could happen to the global financial system if another "too big to fail" bank faces a significant confidence issue.

Goldman Sachs and the Justice Department

With the memories of Lehman still fresh in the minds of government officials, Bernstein believes that despite the calls for aggressive action against Goldman, we would expect that the Justice Department officials responding to the calls of the Senate to be very cautious when dealing with any too big to fail bank – including Goldman Sachs -- in order to avoid putting the global economy at risk.

Much has changed at the US Department of Justice since the Andersen failure. Bernstein notes that in 2003, Deputy Attorney General Larry Thompson published "Principles of Federal Prosecution of Business Organizations." This Justice Department policy document stated that prosecutors can reward cooperation by offering a negotiated settlement to target company that ranges from immunity from criminal indictment to a deferred prosecution agreement. In the typical corporate deferral agreement, the prosecutor threatens to file a criminal charge against a company, but agrees not to prosecute the claim so long as the institution complies with the terms of a negotiated deferral agreement. Essentially the company is being treated not as a criminal to be punished but as the equivalent of a juvenile offender that can be reformed. There is typically a fine and a probationary period during which a company makes internal reforms and has a Federal monitor. The institution agrees to cooperate with the Justice Department and supports any action against miscreant employees. At the end of the monitoring period, if the company was a good corporate citizen,the charges are dismissed as if nothing happened. According to Spivac and Raman28, deferred prosecutions or no-prosecution agreements have been entered into by AIG, America Online, Boeing, Bristol-Myers Squibb, Health-South, KPMG, MCI, Merrill Lynch and British Petroleum. Spivac and Raman noted that an NPA is "somewhere in between the all-or-nothing choice between indicting (and destroying) a company and giving it a complete pass."

We must conclude that the risk of a criminal charge is so great to a large bank that in order to minimize the possible consequences, assuming a alleged violation is identified, the Justice Department would likely offer a deferred prosecution agreement as an alternative. And if facing the threat of a criminal indictment and a deferred prosecution agreement any global bank would certainly accept the DPA.

For Goldman's partners we hope that after having proved themselves to be so successful in the credit crisis, they avoid the sin of hubris and attempt to placate the public. Fair or not, GS is being held responsible for all the sins of the financial community and the public is expecting an apology. If Akio Toyoda, the grandson of Toyota's founder can publically apologize in front of Congress for the perceived safety failures his company29, Goldman can show that it too is contrite for the failures of its industry.

28 "Regulating The 'New Regulators: Current Trends In Deferred Prosecution Agreements". American Criminal Law Review Peter Spivack and Sujit Raman29 One year later, the Toyota safety problems proved to be largely unfounded.

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Bernstein hopes that much of what investors are hearing from the District of Columbia proves to be simply political theatre. We believe that it is reasonable to assume that the Justice Department, the SEC, the US Treasury and the Federal Reserve are coordinating their decision making and that Bill Clinton is correct in his assessment that the government does not always "mess up a two car parade."As fundamental investors we continue to believe our outperform rating is justifiable for Goldman Sachs based on the power of the GS franchise and the firm's low valuation.

Exhibit 10Underwriters Liability - A Summary of Section 11, 12(a)(2) and 10(b) of the Securities Act of 1933.

Securities Act of 1933. The Securities Act of 1933 requires issuers to file a registration statement before issuing securities.

Section 11 of the Securities Act gives a cause of action to an investor when a registration statement, prospectus, or other information "contains an untrue statement of material fact or omitted to state a material fact". Under Section 11, a fact is considered to be material if a reasonable investor would consider it to be significant in making an investment decision. The investor does not need to prove the registration statement or the prospectus was actually read. Reliance on the statement does not need to be proved, nor does the investor in the security have to prove any causation connection between the mistake and losses on the security. Scienter (knowledge of doing wrong) is not a requirement of a Section 11 underwriter's liability claim.

Under Section 11, an investor can recover the difference between the amount paid for the securities and the exit price received when the securities were sold. However, if an investor is successful in a Section 11 case the underwriter can still argue that there was no link between the disclosure error and the actual loss incurred by the investor. Thus if an underwriter's legal defense team can show that the decline in the value of the securities was due solely to changing market conditions and not due to disclosure issues, there are no Section 11 damages.

A Section 12(a)(2) claim is similar to a Section 11 claim. Section 12(a)(2) can be used to bring a claim against the underwriter offering a security if the prospectus or oral communication, "includes an untrue statement of a material fact.." In order for the investor to pursue this claim, the investor must prove that in being offered a security, there was a material untrue statement made and that the investor did not know the statement was false or misleading.

If the underwriter can prove that the investor knew the truth of the misrepresented fact in the disclosure, or the fact was not material to the loss incurred by the investor, then the underwriter can avoid liability. When an investor succeeds in a 12(a)(2) case, the plaintiff can receive damages calculated as if the securities purchase was cancelled.

Section 10(b) of the Securities Exchange Act provides a cause of action for investors alleging fraudulent misstatements by underwriters. Section 10(b) civil claims require proof of intentional fraud or recklessness. To prove civil fraud, the investor will have to show that a material fact was misstated directly caused the loss in the value of the investment. These are difficult standards to achieve in a typical underwriting. The Sarbanes-Oxley Act of 2002, extended the statute of limitations for securities fraud to the earlier of two years after the discovery of the fraud or five years after the fraud occurred.

Source: Sanford Bernstein Legal Consultant and Securities Lawyer's Deskbook

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Disclosure Appendix

Valuation Methodology

Bernstein has found that the major brokerage firms’ common stocks trade on a price-to-tangible book basis. Bernstein believes that the tangible book value of a securities firm is a “hard number” for these companies reflecting the industry’s mark-to-market accounting discipline and the relatively rapid turnover of brokerage firm balance-sheets. By comparison, forecasting the highly cyclical earnings is problematic and therefore price-to-earnings valuation ratios are not accurate or stable.

The price targets are based upon a valuation model that takes into account Return on Equity (ROE) versus Ke (the CAPM-based cost of equity), credit rating and a variable that differentiates between the 1999-2000 internet bubble period and all other periods of history. The formula is:

P/TB (Banks) = 1.35 x Forecasted Tangible ROE NTM / Bank Industry Ke – 0.2112

Investors should note that this price-to-book valuation regression only explains 85% of the quarterly change in price-to-book of a bank or securities firm. Goldman Sachs is currently trading in the lowest 4% of its post IPO P/TB range.

Risks

As investors learned from the Lehman Brothers Holdings and the Drexel Burnham Lambert bankruptcies, the most significant risk to any major broker-dealer is a loss of confidence in its name, especially in the credit markets. Despite their conversion to a bank holding company, the major broker-dealers still rely upon the ability to roll over their debt at reasonable interest rates in order to fund their balance sheets at gross leverage ratios of 13X to 15X. The inability to meet debt obligations will result in the failure of a broker-dealer. In order to prevent a liquidity issue, a broker-dealer can sell assets to raise cash, but in the illiquid markets of a 'tail event' this may be impossible.

Counter-parties tend to limit exposure to firms whose credit ratings face downgrades and are perceived as being in risk. So, in a crisis of confidence, while a firm may avert a liquidity event, the firm's brand name and ongoing business will also come under threat. A prolonged loss of confidence in a firm's name would significantly reduce the ability of its stock to achieve our share price target. Other key risks include rising net charge-off rates, rising asset impairment write-downs, lowered ability to generate tax benefits, and the potential for increasing government regulation and taxation of financial institutions which may constrict asset and leverage levels.

But today, there exists a longer term challenge facing Goldman Sachs and Morgan Stanley; this is the uncertainty of new regulations. The Bank of England, the Swiss Central Bank, the Federal Reserve, the FDIC, the OCC, the CFTC, the SEC, both U.S. Houses of Congress and the Basel Committee have proposed new regulations and laws that will raise capital charges, limit balance sheets, increase liquidity, prohibit or limit some businesses and constrain risk taking. These new rules generally will negatively impact GS' fixed income, equities and commodity trading business and constrain private equity. The more severe the regulations the lower the ROE and the slower the revenue growth rate of the effected businesses.

SRO REQUIRED DISCLOSURES

References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, and Sanford C. Bernstein, a unit of AllianceBernstein Hong Kong Limited, collectively.

Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration, productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or contributions to, generating investment banking revenues.

Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on the U.S. and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for Russian companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed on emerging markets exchanges outside of the Asia Pacific region, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (ex-Japan) exchanges - unless otherwise specified. We have three categories of ratings:

Outperform: Stock will outpace the market index by more than 15 pp in the year ahead.

Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead.

Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead.

Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily.

As of 05/25/2011, Bernstein's ratings were distributed as follows: Outperform - 43.6% (1.0% banking clients) ; Market-Perform - 48.9% (0.9% banking clients); Underperform - 7.5% (0.0% banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers in parentheses represent the percentage of companies in each category to whom Bernstein provided investment banking services within the last twelve (12) months.

Brad Hintz, as a former Managing Director at Morgan Stanley Group (MS), owns an equity position in MS that is held in a Morgan Stanley Group ESOP Trust at Mellon Bank as convertible preferred stock. These MS ESOP securities were awarded to him as compensation and are fully vested. Mr. Hintz is also an investor in Morgan Stanley Capital Partners III, LP — a merchant banking fund where Morgan Stanley maintains an equity interest as a limited partner. Mr. Hintz participates in the Morgan Stanley Pre Tax Investment Plan, which is a deferred compensation plan structured as a note to Mr. Hintz from Morgan Stanley with the return on the note tied to one of many alternative asset classes. In addition, as a result of the complete spin-off of Discover from Morgan Stanley on June 30, 2007, Mr. Hintz received a long position in Discover stock as a beneficiary of the Morgan Stanley ESOP. These shares of Discover will ultimately be distributed to Mr. Hintz by the ESOP trustee.

Mr. Hintz maintains a long position in Chicago Mercantile Exchange Holdings Inc. (CME).

Accounts over which Bernstein and/or their affiliates exercise investment discretion own more than 1% of the outstanding common stock of the following companies GS / Goldman Sachs.

The following companies are or during the past twelve (12) months were clients of Bernstein, which provided non-investment banking-securities related services and received compensation for such services GS / Goldman Sachs.

An affiliate of Bernstein received compensation for non-investment banking-securities related services from the following companies GS / Goldman Sachs.

12-Month Rating History as of 05/31/2011

Ticker Rating Changes

GS O (RC) 06/04/09

Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated

Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change

A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will adwhen coverage of securities commences and ceases. Bernstein has no policy or standard as to the frequency of any updates or changes to its coverage policies. Although the definition and application of these methods are based on generally accepted industry practiceplease note that there is a range of reasonable variations within these models. The application of models typically depends on forecrange of economic variables, which may include, but not limited to, interest rates, exchange rates, earnings, cash flowssubject to uncertainty and also may change over time. Any valuation is dependent upon the subjective opinion of the analysts valuation.

This document may not be passed on to any person in the United Kingdom (i) authorised person or exempt person within the meaning of section 19 of the UK Financial Services and Markets Act 2000 (the "Aas a person to whom the financial promotion restriction imposed by the Act does not apply by virtue of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, or is a person classified as an "professional client" for the purposes of the Conduct the Financial Services Authority.

To our readers in the United States: Sanford C. Bernstein &responsibility for its contents. Any U.S. person receiving this publication and wishing to effect securities transactions in herein should do so only through Sanford C. Bernstein & Co., LLC.

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OTHER DISCLOSURES

A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will adcommences and ceases. Bernstein has no policy or standard as to the frequency of any updates or changes to its

coverage policies. Although the definition and application of these methods are based on generally accepted industry practicenote that there is a range of reasonable variations within these models. The application of models typically depends on forec

range of economic variables, which may include, but not limited to, interest rates, exchange rates, earnings, cash flowssubject to uncertainty and also may change over time. Any valuation is dependent upon the subjective opinion of the analysts

This document may not be passed on to any person in the United Kingdom (i) who is a retail client (ii) unless that person or entity qualifies as an authorised person or exempt person within the meaning of section 19 of the UK Financial Services and Markets Act 2000 (the "A

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Sanford C. Bernstein & Co., LLC is distributing this publication in the United States and accepts responsibility for its contents. Any U.S. person receiving this publication and wishing to effect securities transactions in

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This publication has been issued or approved for issue in the United Kingdom by Sanford C. Bernstein Limited, authorised and regulated by the Financial Services Authority and located at Devonshire House, 1 Mayfair Place, London W1J 8SB, +44

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Sanford C. Bernstein & Co., LLC and Sanford C. Bernstein Limited are exempt from the requirement to hold an licence under the Corporations Act 2001 in respect of the provision of the following financial services to wholesale

Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited and AllianceBernstein Hong Kong Limited are regulated by, respeSecurities and Exchange Commission under U.S. laws, by the Financial Services Authority under U.K. laws, and by the Hong Kong Securities and Futures Commission under Hong Kong laws, all of which differ from Australian laws.

A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will advise as and commences and ceases. Bernstein has no policy or standard as to the frequency of any updates or changes to its

coverage policies. Although the definition and application of these methods are based on generally accepted industry practices and models, note that there is a range of reasonable variations within these models. The application of models typically depends on forecasts of a

range of economic variables, which may include, but not limited to, interest rates, exchange rates, earnings, cash flows and risk factors that are subject to uncertainty and also may change over time. Any valuation is dependent upon the subjective opinion of the analysts carrying out this

who is a retail client (ii) unless that person or entity qualifies as an authorised person or exempt person within the meaning of section 19 of the UK Financial Services and Markets Act 2000 (the "Act"), or qualifies

tion restriction imposed by the Act does not apply by virtue of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, or is a person classified as an "professional client" for the purposes of the Conduct of Business Rules of

Co., LLC is distributing this publication in the United States and accepts responsibility for its contents. Any U.S. person receiving this publication and wishing to effect securities transactions in any security discussed

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This publication has been published and distributed in accordance with Bernstein's policy for management of conflicts of interest in investment research, a copy of which is available from Sanford C. Bernstein & Co., LLC, Director of Compliance, 1345 Avenue of the Americas, New York, N.Y. 10105, Sanford C. Bernstein Limited, Director of Compliance, Devonshire House, One Mayfair Place, LondonW1J 8SB, United Kingdom, or Sanford C. Bernstein, a unit of AllianceBernstein Hong Kong Limited, Director of Compliance, Suite 3401, 34th Floor, One IFC, One Harbour View Street, Central, Hong Kong.

CERTIFICATIONS

I/(we), Brad Hintz, Senior Analyst(s)/Analyst(s), certify that all of the views expressed in this publication accurately reflect my/(our) personal views about any and all of the subject securities or issuers and that no part of my/(our) compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views in this publication.

Approved By: NK

Copyright 2011, Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, and AllianceBernstein Hong Kong Limited, subsidiaries of AllianceBernstein L.P. ~ 1345 Avenue of the Americas ~ NY, NY 10105 ~ 212/756-4400. All rights reserved.

This publication is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Bernstein or any of their subsidiaries or affiliates to any registration or licensing requirement within such jurisdiction. This publication is based upon public sources we believe to be reliable, but no representation is made by us that the publication is accurate or complete. We do not undertake to advise you of any change in the reported information or in the opinions herein. This publication was prepared and issued by Bernstein for distribution to eligible counterparties or professional clients. This publication is not an offer to buy or sell any security, and it does not constitute investment, legal or tax advice. The investments referred to herein may not be suitable for you. Investors must make their own investment decisions in consultation with their professional advisors in light of their specific circumstances. The value of investments may fluctuate, and investments that are denominated in foreign currencies may fluctuate in value as a result of exposure to exchange rate movements. Information about past performance of an investment is not necessarily a guide to, indicator of, or assurance of, future performance.

Documents

Goldman Sachs: Assessing Litigation Riskonline.wsj.com/public/resources/documents/060711goldmandoc.pdf · 01-06-2011 · Goldman Sachs: Assessing Litigation Risk Ticker Rating CUR