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Goldman accused of subprime fraud
By Alan Rappeport in New York
Published: April 16 2010 16:11 | Last updated: April 16 2010 19:11
US authorities accused Goldman Sachs of fraud on Friday over a subprime mortgage security that caused $1bn-plus in losses to investors, in the toughest regulatory response so far to the excesses of the credit-bubble era.
News of the civil action by the Securities and Exchange Commission wiped more than $12bn off Goldman’s market value, cast doubt over the future of the bank’s leadership team and business model and rocked other Wall Street banks.
In the first of what promises to be a series of actions over banks’ roles in the financial crisis, the SEC accused Goldman and one of its vice-presidents of failing to disclose that the hedge fund Paulson & Co had a major role in creating a collaterised debt obligation, a security that was backed by subprime mortgages, in 2007.
Goldman denied the charges and vowed to “vigorously contest them and defend the firm and its reputation”.
But news of the SEC charges knocked its shares and intensified speculation over the position of Lloyd Blankfein, its chief executive. The SEC said Goldman’s “senior-level management” approved the CDO but did not name any executives.
In afternoon trading, Goldman shares were down nearly 12 per cent to 162.18 – above the $115 at which Warren Buffett, who injected $5bn into the bank in the crisis, has the right to buy.
The plunge in Goldman’s stock dragged down shares in other banks amid fears the SEC’s months-long investigation into Wall Street’s subprime dealings will target other institutions. The Dow Jones Industrial Average was also in the red, falling more than 1 per cent by early afternoon.
The civil complaint alleges that, Goldman and Fabrice Tourre, one of its vice-presidents, hid from investors the fact that Paulson & Co, which has not been charged, had a heavy hand in influencing the composition of the loans that made up the synthetic CDO. Mr Tourre could not be reached.
The regulators further claim that Mr Paulson’s firm pushed for low-quality loans to be included in the CDO because he was shorting the security through a separate agreement with Goldman that was not disclosed to investors.
Goldman told investors that the loans had been selected by ACA, an independent firm - a statement that prompted investors such as the German bank IKB - to buy the security - the SEC claims.
“The product was new and complex but the deception and conflicts are old and simple,” said Robert Khuzami, SEC director of enforcement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio.”
Within nine months of the creation of the CDO, 99 per cent of its loans had been downgraded, yielding Paulson & Co a profit of $1bn. Investors around the globe including IKB, which became the first casualty of the credit crisis in July 2007, lost $1bn, the complaint said.
Goldman made $15m-$20m from the CDO, according to the SEC, and a further $841m when ABN Amro, the Dutch bank that had taken on the risk associated with a tranche of the CDO, had to pay out. Most of the ABN Amro payment went to Paulson & Co, according to the SEC.
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FT.com / Companies / Banks - Goldman accused of subprime fraud
here's a link to the full text of the sec complaint against goldman sachs:
http://media.ft.com/cms/9e6480f0-497...144feab49a.pdf
here an edito from the financial times on this fiasco, which outlines the situation pretty well:
FT.com / Comment / Editorial - SEC takes off the gloves on Goldman
i think this is interesting...the story is still taking shape and i am in the mines so haven't really time to develop as comprehensive op as i'd like, but i think the approach at once a good thing and also curiously limited in that there were systemic problems around the subprime/mortgage backed securities businesses...and going after goldman as the first move seems a version of the "bad apple" idea...the system is in itself legitimate/functional except for distortions introduced by a few rogue elements.
but at the same time, there seems from the material that's publicly available that the charges are merited.
and it's interesting to read the financial times arguing that if the charges are true that the book should be thrown at goldman.
what i am wondering is whether in their effort to defend themselves goldman will open this onto the systemic problems that attended this derivatives trading and in the process open the way to far more regulation of cowboy capitalism than is on the table already.
what are your thoughts?
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addendum:
what the sec is, what it can and cannot do:
http://en.wikipedia.org/wiki/U.S._Se...nge_Commission
another bullet-pointy summary of the sec's charges against goldman:
http://www.marketwatch.com/story/sec...k=MW_news_stmp
and another, from truth out:
http://www.truthout.org/government-c...ith-fraud58633
i post all this stuff because it's not obvious what the charges are really about nor what the consequences of their being filed will ultimately be.
but it is a step.
my pollyanna side thinks, as i mentioned above, that the financial oligarchy could find itself being brought under the control of the legal apparatus that functions, particular under the rubric of "free markets," to protect them (and not regular people from them.)