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.
