Between this and their “high frequency trading”…are we seeing karma coming back around on GS?
Goldman Sachs, the Wall Street powerhouse, was accused of securities fraud in a civil lawsuit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly intended to fail.
The move was the first time that regulators had taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market.
The suit also named Fabrice Tourre, a vice president at Goldman who helped create and sell the investment.
Of course Goldman is claiming this is unfounded, but I find it hard to believe that the S.E.C. would make such a specific, public pronouncement if they didn’t have some pretty iron clad evidence.
And when you look at the S.E.C.’s claims…it’s pretty damning stuff…
The focus of the S.E.C. case, an investment vehicle called Abacus 2007-AC1, was one of 25 such vehicles that Goldman created so the bank and some of its clients could bet against the housing market. Those deals, which were the subject of an article in The New York Times in December, initially protected Goldman from losses when the mortgage market disintegrated and later yielded profits for the bank.
As the Abacus portfolios in the S.E.C. case plunged in value, a prominent hedge fund manager made money from his bets against certain mortgage bonds, while investors lost more than $1 billion.
According to the complaint, Goldman created Abacus 2007-AC1 in February 2007 at the request of John A. Paulson, a prominent hedge fund manager who earned an estimated $3.7 billion in 2007 by correctly wagering that the housing bubble would burst. Mr. Paulson is not named in the suit.
Goldman told investors that the bonds would be chosen by an independent manager. In the case of Abacus 2007-AC1, however, Goldman let Mr. Paulson select mortgage bonds that he believed were most likely to lose value, according to the complaint.
Goldman then sold the package to investors like foreign banks, pension funds and insurance companies, which would profit only if the bonds gained value. The European banks IKB and ABN Amro and other investors lost more than $1 billion in the deal, the commission said.
“Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio,” Robert Khuzami, the director of the commission’s enforcement division, said in a written statement.
In short (heh!)…while Goldman was selling investments that the housing market would go up, they were betting that the housing market would go down.
But, regardless of whether or not Goldman will ever have to answer for this (buyer beware clauses, etc…), the good news about this announcement is that the S.E.C. is back and doing what they should have been doing all along…policing the market and the players within it.