Goldman Sachs Cuts Estimate for Potential First-Quarter Legal Losses 21%

Goldman Sachs Group Inc. (GS), the fifth- biggest U.S. bank by assets, cut its estimated losses from legal claims by 21 percent in the first quarter.

The bank’s “reasonably possible” losses from lawsuits dropped to $2.7 billion as of March 31 from $3.4 billion at the end of 2010, according to its quarterly filing today with the Securities and Exchange Commission.

The estimate, the second of its kind disclosed by the firm, is the “upper end” of losses in matters where the risk is “more than remote but less than likely,” New York-based Goldman Sachs said in the filing.

Banks started releasing estimates of possible losses after the SEC told corporate finance chiefs in October that they should disclose such costs “when there is at least a reasonable possibility” that they may be incurred, even if the risk is too low to require reserves. Bank of America Corp. (BAC), the biggest U.S. lender, has said legal and regulatory matters may cost $150 million to $1.6 billion beyond what it has reserved.

Staff at the Commodity Futures Trading Commission advised Goldman Sachs Execution & Clearing LP, known as GSEC, that they intend to recommend legal action against the unit related to its role as clearing broker for a broker-dealer, the company disclosed in today’s filing.

The CFTC staff alleges that GSEC “knew or should have known” that the client’s sub-accounts maintained at GSEC were accounts belonging to customers of the broker-dealer and not the broker-dealer’s own accounts, according to the filing.

Subpoenas Omitted

The filing also included a reference to subpoenas that Goldman Sachs and certain affiliates received from regulators regarding sales of collateralized debt obligations, including the firm’s Abacus 2007-AC1 deal. The company’s last quarterly filing, its annual report on March 1, disclosed that it received requests for information, omitting mention of the subpoenas.

In July, Goldman Sachs paid $550 million to settle a lawsuit filed by the SEC that accused the firm of misleading investors in the Abacus CDO. A U.S. Senate subcommittee report on the financial crisis that used Goldman Sachs as a case study accused the firm of misleading investors about some CDOs. The report was referred to the Department of Justice and the SEC.

Washington Mutual

Goldman Sachs was among underwriters of securities offerings by Washington Mutual Inc. (WAMUQ) that were accused in an Aug. 5, 2008, lawsuit of failing to accurately describe Washington Mutual’s exposure to mortgage-related activities. Federal regulators seized Washington Mutual on Sept. 25, 2008. The parties reached a “settlement in principle” on March 30 that would require Goldman Sachs to contribute to a settlement fund, the firm disclosed today.

Goldman Sachs said it has reserved the full amount of its proposed contribution, without disclosing how much that is. Goldman Sachs underwrote about $520 million of Washington Mutual securities that are subject to the complaint, the company said.

At Goldman Sachs’s annual shareholder meeting on May 6, General Counsel Gregory K. Palm said that the firm spent $726 million on legal fees last year and that it employs 286 full- time lawyers, up from 252 a year ago.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.

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