Today, the Securities and Exchange Commission filed fraud charges against Goldman Sachs accusing the Wall Street giant of defrauding investors by failing to disclose that it was packaging toxic Collateralized Debt Obligations for some clients while betting against those same investments for their own interests and on behalf of other clients.According to Bloomberg:
"The SEC alleged that Goldman Sachs structured and marketed CDOs that hinged on the performance of subprime mortgage-backed securities and failed to disclose to investors that hedge fund Paulson & Co. was betting against the CDOs, known as Abacus, and influenced the selection of securities for the portfolio, the SEC said. Paulson wasn’t accused of wrongdoing."
Goldman Sachs responded to the SEC civil complaint as “completely unfounded in law and fact” and Goldman promises that it will “vigorously contest them and defend the firm and its reputation.”
The scheme as identified in the SEC complaint was the initiation of Abacus 2007-AC1 at the request of a prominent hedge fund manager John Paulson (who earned close to $3.7 billion in 2007 correctly wagering against the housing bubble). Goldman allegedly allowed its client Paulson to select the actual mortgage bonds that he wanted to bet against, those most likely to fail, and then packaged and securitized those subprime mortgages for Paulson into Abacus 2007-AC1, an investment vehicle that Goldman then peddled to investor clients including foreign banks, pension funds, hedge funds and insurance companies without disclosing the true nature of the investment (built to fail). The client and Goldman, then bet that this instrument would fail through purchasing credit default swaps against failure and then shorting it.
This allegation sounds very similar to the admissions made by Washington Mutual executives earlier this week, where the bank admitted knowingly securitizing instruments of its worst loans, those that would undoubtedly fail, and then selling the dreck to investors sans disclosure.
That the SEC has decided to take on global financial titan Goldman Sachs is a signal to the broader market that it is intent on stripping the subprime market crisis down and exposing the greed and avarice that overwhelmed Wall Street during the subprime housing bubble.
Professor cummings,
ReplyDeleteThis is a wonderful blog piece! It appears that the SEC is awaking from a slumber. It will be interesting to see who's next.
First of all, GS is lucky these were not criminal sanctions and it is just fraud. (Not to downplay fraud, but the consequences on a corporation are less severe). It is very plausible that GS insiders knew of a looming problem in the sub-prime market back in the mid 2000s because when the bubble burst, GS had already vacated many of those securities and suffered minimal damage compared to many of their counterparts. Many pundits lauded GS for their ability to weather the storm and remain prominent in stocks and securities at the time.
ReplyDeleteTo be fair, GS has been ahead of the proverbial curve for quite some time so it is easy to see where these pundits were coming from. The allegation today of GS failure to disclose to investors the severity of the information which they knew at the time is not that far fetched based on how well GS did make out when the sub-prime mortgage market collapsed. Goldman obviously knew of many people's reliance on default credit swaps and junk bonds and they shorted the sales in time (and probably at a deep discount) before other companies could catch on. They also did not disclose their findings to investors.
Throughout the crisis, GS was still able to give dividends out while many of the buyers of these junk securities failed and collapsed under the weight of the trash they thought was treasure. It is just ironic that the main hedge fund involved was Paulson & Co., founded by former GS CEO and US Secretary of Treasury Henry Paulson. Would it be too far fetched to see the SEC delaying this information until the media had loosened its salacious attempts to publicize the cronyism and schematics of NGOs and investment banks? I think not.
Reportedly the Government is even considering criminal charges for the defrauding of customers. Moving forward with either or both a civil and/or criminal action should be forceful enough to generate bi-partisan support for financial reform. Holding Corporations responsible for the mortgage burst and economic crisis of our Country is the first step.
ReplyDeleteIn an article today in the New York Times entitled, "Top Goldman Leaders Said to have Overseen Mortgage Unit, writer Louise Story comments that, "Goldman has vowed to fight the S.E.C...But the allegations on Wall Street wondering how far the investigation might spread inside Goldman and perhaps beyond." She added that two members of Congress as well as the prime minister of Britain and possibly Germany were asking for investigations and considering legal action against Goldman. At the moment, only one individual is included in the suit (one of the creators of the Abacus investment). But, the fact that high-ranking officials in the corporation had visited the mortgage department sometimes for "hours" may eventually bring more and more parts of this corporation into these legal entanglements.
ReplyDeleteSome articles are saying that this is only the beginning as new charges are being filed by Germany, UK and private investors. I have a feeling that even though Goldman's pockets run much deeper than SEC's, the outcry from the public and Congress, should balance it out in the courtroom. They are going to try to make an example out of them for being the first ones to get caught.
ReplyDeleteGoldman Sachs has scheduled a conference call open to the public for Tuesday, 4/20/10, at 8AM to discuss the SEC complaint. According to the GS website, the dial-in number is 1-888-281-7154 for US domestic callers and 1-706-679-5627 for International callers.
ReplyDeleteLives were destroyed by these acts. Goldman should loose its charter and responsible parties should be behind bars.
ReplyDeleteIt's about time the SEC takes some action. There is no excuse for defrauding the American public. I hope some criminal charges are filed.
ReplyDeleteThe SEC should start targeting the hedge funds next.
I can't believe a financial giant like Goldman Sachs would stab its investors in the back the way they did. Do they want to lose clients? Do they not realize the fact that they are alienating their clients and destroying their name? The SEC needs to regulate Goldman but the fact of the matter is that Washington's financial arm is headed by a former Goldman CEO. Goldman has too many ties with the government and too much money to lobby for soft regulation. They may not get regulated stringintly, but, I think investors will think twice before investing with Goldman.
ReplyDeleteAnother disclosure case. The SEC claim against GS is going to come down to answering whether or not GS withheld material information from its investors when pitching CDO's structured by a 3P (Paulson). Was Paulson an independent 3P or not?
ReplyDeleteMany people wonder if GS will earn the people's trust again. The answer is simply YES. GS ain't goin nowhere! Every bank at one point or another was involved in the same thing.
The above comment is by Anthony Gonzalez
ReplyDeleteThese crooks at Goldman Sachs need to be prosecuted in their individual as well as corporate capacities. The SEC filing is not the end of the saga for this institution and others who participated in perpetuating these crimes. Other countries, including the UK, are contemplating bringing their own separate actions against Goldman Sachs. While only one individual is named in the complaint filed by the SEC, in the recent Senate Investigation it was apparent that the entire corporate management knew about and encouraged the actions which defrauded investors in the mortgage-backed junk status derivatives. They sold the securities as a top priority in order to get the crap off their books before the purchaser realized the true cost of the transaction. Corporate greed can be a good thing when profits are made for the benefit of shareholders and consumers, however, where actions are taken without regard to the larger impact on consumers and society in general, the acts must be punished. Personally, I would like to see a RICO charge brought against the entire corporate hierarchy of Goldman Sachs for running an ongoing criminal enterprise which intended to – and did – defraud investors.
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