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Goldman Sachs executives endured a barrage of questions from the investment community and reporters Tuesday for its role in creating a complex mortgage security which has since prompted federal fraud charges against the company.

Even as Wall Street’s top investment bank reported a first-quarter profit of $3.5 billion, the results did little to alleviate the intense scrutiny the firm has been under since the Securities and Exchange Commission charged the firm with defrauding investors last Friday.

Goldman Sachs shares have struggled to recover in the wake of the SEC’s fraud charges against the financial giant.

Last week, the agency filed a civil suit against Goldman, alleging that the New York City-based company allowed hedge fund Paulson & Co., who made billions of dollars betting against the U.S. mortgage market, to help select securities in a so-called collateralized debt obligation, or CDO.

The SEC also charged Goldman with failing to tell investors that Paulson was betting that the value of the investment would decline. Investors in the security ultimately lost $1 billion, according to the SEC.

Goldman Sachs executives rejected many of the SEC’s claims Tuesday, maintaining that Paulson never had a hand in selecting the securities and that the other investors in the deal were never deceived in any way.

“We would never intentionally mislead anyone,” said Greg Palm, Goldman’s co-general counsel during a conference call with investors Tuesday morning.

Palm, joined by Goldman’s chief financial officer David Viniar, maintained that the two lone investors in the fund – German bank IKB and bond insurer ACA Capital – did their own extensive research.

Goldman also deflected suggestions that it profited from the failure of the deal. It said the firm had no “economic motivation” for its investors to lose money, adding that it invested alongside the pair, losing over $100 million as a result of the transaction.

Where Goldman really went wrong

The two executives also downplayed speculation that it could be facing criminal charges from the federal government, namely the Justice Department. Palm said Goldman has had no “conversations” beyond the SEC’s civil charges.

So far, the company has made it clear it has every intention of fighting the government’s charges. In the wake of Friday’s announcement, Goldman called the charges “unfounded”, adding that they planned to “vigorously contest” them.

When pressed on the issue by an analyst Tuesday however, Viniar didn’t seem to rule out the possibility of a settlement with the SEC.

“We don’t know how this case will unfold at this point,” he said.

Goldman executives hinted Tuesday that they tried to resolve the matter with regulators when the company was first alerted to the probe in August of 2008. But after providing regulators with extensive details about their mortgage documents, executives said they were caught off-guard by Friday’s announcement.

Some analysts and journalists, however, questioned why the firm kept the firm secret from its shareholders.

“Given the fact we thought we had a good case, we thought we didn’t have any need to disclose it,” said Palm in a call with reporters.

Conspicuously absent from the two conference calls was Goldman Sachs CEO Lloyd Blankfein, who has been under intense scrutiny in recent months on a number of issues — including the firm’s employee bonus program.

Blankfein acknowledged the suit in a statement, but did little more than thank its clients, shareholders and employees for standing with the firm.

“In light of recent events involving the firm, we appreciate the support of our clients and shareholders, and the dedication and commitment of our people,” Blankfein said in the statement.

Market focuses on strong earnings

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Citigroup delivered its strongest results since the start of the financial crisis, as the banking giant reported a first-quarter profit of $4.4 billion Monday.

Earnings for the bank, one of the hardest hit institutions in the financial crisis, easily shattered Wall Street estimates. On a per share basis the company said it earned 15 cents. Analysts polled by Thomson Reuters expected the company to break even for the quarter.

The rebound in Citigroup shares appears as if it will continue following Monday’s impressive results.

Citigroup shares, which are up 55% from a year ago, gained over 3% in afternoon trading on the news.

Investors have been anxious for Citigroup to return to a sustained level of profitability after the bank endured billions of dollars in losses over the past two years. The latest results, Citi’s biggest profit since the second quarter of 2007, suggest that it may have finally found its footing.

“Citi today is fundamentally a very different company from what it was only two years ago,” Citigroup CEO Vikram Pandit said in a statement.

The company also made a point of disclosing it was not involved with last Friday’s announcement by the Securities and Exchange Commission, which alleged that competitor Goldman Sachs defrauded investors in a sale of securities tied to subprime mortgages.

John Gerspach, Citigroup’s chief financial officer, added that the company was cooperating with ongoing investigations being conducted by the SEC, but declined to comment further.

Citigroup’s latest results were defined by two key trends: improving credit quality and a surge in trading activity.

The New York City-based bank said it experienced marked improvement in both its consumer and corporate loan portfolios provided a lift during the quarter. Moderating loan troubles across its U.S. residential mortgage business, for example, prompted the company to set aside less money for future loan losses.

“Things are getting better in terms of credit, not worse,” said William Smith, president and senior portfolio manager at Smith Asset Management, whose firm owns shares of Citi. “Once things stabilize, hopefully [Citi] can reverse some of those loan-loss provisions.”

Conditions also appeared to improve within the company’s Citi Holdings division, which was created to house the firm’s so-called “troubled assets” and businesses it has been looking to sell. Losses within the unit narrowed to $876 million from $2.5 billion in the fourth quarter of 2009.

But the biggest driver of Citi’s results was its securities and banking division, particularly its bond trading business. Revenue from that unit more than doubled from the previous quarter to $5.4 billion.

Strong trading profits also helped Bank of America and JPMorgan Chase in the first quarter. Each enjoyed a bump in trading revenue that helped them deliver better-than-expected profits last week.

Executives at Citi cautioned though that those numbers were driven by a seasonal spike in activity and were unlikely to be repeated in the following quarters.

Pandit, who has been under scrutiny for his ability to lead the company, also warned that profits within the firm’s other divisions were also susceptible.

The bank’s consumer lending business, he noted, could suffer if Washington attempts to enact a severe new set of rules for Wall Street or if the recovery in the U.S. economy gets derailed.

“We are proud of our first quarter results but remain cautious about the environment, given the uncertain economic recovery and high unemployment in the U.S.,” he said.

Citigroup must also contend with having the U.S. government as its largest shareholder. Taxpayers still own a 27% stake in the company, although the Treasury Department has said it planned to dispose of its remaining stake in the firm “as soon as possible.”

Still, Citi’s strong first quarter puts the company well on the way to reaching earnings projections offered last month by Pandit. During a company-sponsored conference in March, he told investors that he expected the company to soon be able to deliver profits of approximately $20 billion.

The numbers should also provide additional encouragement about the health of the nation’s top banks. Of the big banks that have reported so far, all have delivered results that were far better than most industry analysts were anticipating.

Several other key banks are due to report this week, including Goldman Sachs on Tuesday. Goldman is expected to report strong profits but that news is likely to be overshadowed by Friday’s announcement from the SEC.

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Toyota Motor Corp. has agreed to pay a record $16.4 million fine for allegedly failing to notify the Department of Transportation (DOT) of a “sticky pedal” defect in its cars for at least four months after learning of the problem.

The fine, which could have been many times larger had it not been for caps on such penalties, does not mark an end of the repercussions from Toyota’s recent spate of safety-related quality issues. Other investigations and lawsuits still loom.

Toyota has recalled over 8 million vehicles, worldwide, for various defects.

The fine was levied by the DOT’s National Highway Traffic Safety Administration, the agency responsible for overseeing auto safety regulations.

Even while agreeing to pay the fine, Toyota denied the government’s allegations.

“We believe we made a good faith effort to investigate this condition and develop an appropriate counter-measure,” the automaker said in a statement. “We have acknowledged that we could have done a better job of sharing relevant information within our global operations and outside the company, but we did not try to hide a defect to avoid dealing with a safety problem.”

Toyota said it agreed to pay the fine to avoid “a protracted dispute and possible litigation” and to allow it to focus on its own quality improvement initiatives.

The Transportation Department’s National Highway Traffic Safety Administration said it sought the fine after learning, through documents obtained from Toyota, that the automaker knew of sticky gas pedal problems since at least September of last year.

If not for regulations that capped the fine at $16.4 million, NHTSA would have fined Toyota $13.8 billion, according to a letter the agency sent to the automaker in April.

To arrive at the $13.8 billion figure NHTSA would have counted each vehicle involved in a related recall as a separate violation, as it is allowed to do under federal rules, and fined the carmaker $6,000 for each.

Under federal regulations, automakers are required to inform the agency within five days of determining that a safety defect exists in one of its products.

“By failing to report known safety problems as it is required to do under the law, Toyota put consumers at risk,” said Transportation Secretary Ray LaHood in a statement. “I am pleased that Toyota has accepted responsibility for violating its legal obligations to report any defects promptly.”

A Transportation official noted that paying the fine does not release Toyota from any potential criminal liability or civil liability related to the defects in question.

The agency said it is still investigating other possible violations by the automaker regarding other, separate defects. While $16.4 million is the maximum fine for a single violation of these rules, other violations could result in other fines.

Toyota also faces numerous civil lawsuits over crashes allegedly caused by “unintended acceleration” in Toyota and Lexus vehicles. A number of those lawsuits were recently combined and will be heard together in a California court.

Toyota investigating all its SUVs

Toyota cars and trucks have been the subject of at least three separate major recalls in the past year. One, involving 2.3 million vehicles in the United States, was for the “sticky pedal” situation in which gas pedals, as they age, begin to stick in a partially depressed position. Another was for gas pedals that can stick on some floor mats, and a third was for braking problems on Toyota Prius hybrid cars.

The largest fine levied to date by the government on an automaker was nearly $1 million taken from General Motors in 2004 for failing to deal promptly with a windshield-wiper issue, an amount that was negotiated down from the $3 million originally sought by NHTSA.

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