'Morally bankrupt' Goldman Sachs keeps advisory role

THE government was last night resisting calls to stop employing the investment bank Goldman Sachs as an adviser, despite a new inquiry being launched into its dealings.

An investigation into the bank was announced by City watchdog the Financial Services Authority yesterday amid fraud allegations.

It follows a similar inquiry launched by the US Securities and Exchange Commission.

At the weekend, Prime Minister Gordon Brown described Goldman Sachs as being "morally bankrupt" – before it announced it had spent $5.49 billion (about 3.5bn) on pay and bonuses to employees in the first quarter, including the trader at the centre of the fraud inquiry, Fabrice Tourre.

But yesterday he refused to consider withdrawing Mr Tourre's licence to trade in London and yesterday Chancellor Alistair Darling knocked back demands by Liberal Democrat leader Nick Clegg that the government suspends Goldman Sachs as an adviser.

Currently the government is employing the bank as an adviser on a range of issues, including privatising the Tote and the future of Northern Rock.

The row came as the bank reported net earnings for the first quarter of $3.46bn (2.25bn).

Mr Clegg claimed that both Labour and the Tories – which he described as the "party of choice for the greedy banker" – had been too cosy for too long with the big banks and the City.

And he claimed the parties had been more concerned about the Square Mile than the 100,000 other square miles in the UK.

Accusing Labour of being "asleep at the wheel" as the banking crisis developed, Mr Clegg called for Goldman Sachs to be suspended as an adviser to the government until a US investigation into its subprime mortgage deals is completed.

Lib Dem Treasury spokesman Vince Cable added: "The government should not be paying for the services of a bank that is being investigated on both sides of the Atlantic. The allegations made against Goldman Sachs are extremely serious."

The demand was later repeated by Tory Treasury spokesman Mark Hoban.

He said: "If Gordon Brown believes Goldman Sachs are 'morally bankrupt', why is he still using them as advisers? He is lashing out at the people he was very happy to work with over the last 13 years as both Chancellor and Prime Minister".

But last night Mr Darling made clear that the bank would remain as a government adviser despite the inquiry, saying: "I don't think you can stop doing business with a firm because an individual is accused of doing something."

He added that the accusations made against the bank "beggars belief".

One of the main losers from the alleged fraud is Royal Bank of Scotland through its takeover of Dutch bank ABN Amro.

The alleged fraud cost RBS $841 million (about 547m) and it is understood to be considering its options to get the money back.

THE TIES THAT BIND

ONE of the Prime Minister's closest confidantes is Gavyn Davies, who was chief economist at Goldman Sachs and an adviser to Gordon Brown in opposition and government. Mr Davies is now chairman of the BBC Trust.

The investment bank has been one of the government's main advisers since Labour took office in 1997.

Lib Dem leader Nick Clegg has described the Tories as "the party of choice for greedy bankers". But opponents have pointed out that a close school friend of Mr Clegg – himself the son of a banker – is now co-chief executive of Goldman Sachs Europe.