Goldman Sachs is facing fraud charges for the first time in its history as a public company.
On Friday, in the United States, the Securities and Exchange Commission charged Goldman with hiding from investors the involvement of a prominent hedge fund manager in helping it structure a subprime mortgage debt product that he was betting against.
The deal is said to have cost investors more than $US1 billion ($NZ1.42 billion), according to the SEC complaint.
Goldman vowed over the weekend to vigorously defend itself against the charges and denied that it had structured a portfolio that was designed to lose money, claiming the firm itself invested in the equity portion of the deal.
The news sent Goldman's shares tumbling and cast a shadow over the dominant Wall Street firm.
The charges follow a highly profitable 15-month stretch for Goldman in the aftermath of the financial crisis.
Craigs Investment Partners broker Chris Timms said the charges dented the trust of investors in the giant investment bank.
Goldman had an enviable reputation in the United States and the allegations would create a ripple effect through the global investment banking industry.
Goldman had remained profitable throughout the recent global financial meltdown and the charges were unlikely to result in another US bailout package.
However, global sharemarkets would be affected.
"Ultimately, we live in such a global communications environment that whatever happens in Wall Street filters through to us within 24 hours.
"It is a confidence issue for investors," Mr Timms said.
By mid-afternoon yesterday, the NZX-50 was down 1%, the ASX was down 1.5% and Asian markets were down between 1.5% and 2%.
All of that was a reaction to the Goldman charges, he said.
Safe haven currencies, such as the yen, got a boost as investors fled risky assets.
"It beggars belief that this sort of stuff is happening.
"The chief executives get themselves into a lot of trouble, get out of [it] and then we get this.
"There is now concern there are others in the same situation and how long this can linger on," Mr Timms said.
Reuters reported that the charges filed against Goldman could take months or even years to be resolved.
But analysts were voicing some possible outcomes:
• Goldman might look for a quick resolution to its SEC problems.
• A settlement within a few months, even one which could cost Goldman hundreds of millions of dollars, would be one way for Goldman to try to move on quickly and seek to avoid long-term damage to its brand.
• Even if the firm sought such a settlement, the authorities might not want to risk it given how much of a political hot potato Goldman has become.
• All parties would also be fully aware that a judge rejected an initial settlement between the SEC and Bank of America over the disclosure of bonuses paid in the bank's takeover of Merrill Lynch.
• This would not prevent the potential for lawsuits from clients who felt they had suffered losses because of Goldman's actions.
Such vindication would likely take many months and probably years - and would not be without damage to Goldman, its management and its brand.
Media scrutiny would be even more intense over this period.
In a sign of trouble to come, British Prime Minister Gordon Brown on Sunday said he wanted Britain's financial watchdog to investigate Goldman.
In Germany, a government spokesman said its regulator would also seek information.
Goldman would not only face a big legal bill, and additional compliance costs as it sought to prevent any other problems from surfacing, but it might also impose more restrictions on its bankers and traders, which could reduce making money.
Fighting a long battle could also expose Goldman to a greater extent to lawsuits from investors who feel they were wronged.
It would create a public record of its transactions that could help would-be plaintiffs.
The worst-case scenario is that Goldman fought the authorities, and investigators discovered more problem transactions and charged more executives.
Lawsuits from clients piled up and got very expensive to settle or fight.
"The $[US]64 million question would be is there some sort of unravelling of Goldman that will be coming down the pike, and I'd rather doubt it," said Joseph Battipaglia, a market strategist with Stifel Nicolaus.
Under the worst case, the future of CEO Lloyd Blankfein and other top executives would be in doubt.
Veteran banking analyst Richard Bove, of Rochdale Securities, said on Friday that the charges could lead to Blankfein's resignation.
"People wonder how Goldman was able to make as much money in trading as they did at a time when nobody else was doing anything and maybe this is a reason why," said Malcolm Polley, chief investment officer, Stewart Capital Advisers.
"How widespread this is, time will tell.
"If the SEC has brought charges on one instance my guess is it will open a can of worms."
