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Apr. 16 2010 - 11:39 am | 760 views | 6 recommendations | 35 comments

SEC charges Goldman Sachs with fraud!

The product was new and complex, but the deception and conflicts are old and simple,” Robert Khuzami, the director of the S.E.C.’s division of enforcement, said in a statement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”
Via New York Times

Busted.

The charges revolve around a package of mortgage securities called Abacus 2007-AC1. Here’s how it worked-

At the request of a hedge fund operator named John Paulson, a guy who earned $2.7 billon in 2007 betting that the housing bubble was going to pop, leaving many mortgages in distress, Goldman created the fund allowing Paulson to choose the mortgage bonds he wanted included. They were all bonds that Paulsen believed were the most likely to lose value and, therefore, the ones Paulson most wanted to bet against.

Goldman then – allegedly – went out and sold the Abacus deal to overseas banks, hedge funds and other large players, knowing that the package had been purposefully constructed to lose its value. They allegedly lied about who had chosen the mortgage bonds included as their victims would have known what was going on had they been told that Paulson was picking them.

A big win for Mr. Paulson – a big loser for all the customers Goldman fleeced by enticing them to buy into the deal, expecting to make money when the value of the bonds went up.

Goldman’s defense –

We certainly did not know the future of the residential housing market in the first half of 2007 anymore than we can predict the future of markets today. We also did not know whether the value of the instruments we sold would increase or decrease.”
Via New York Times

Maybe. But they sure did know the bonds included were being hand selected by a short seller with a lot to gain by betting against the bonds.

Since the announcement, Goldman’s share price has tumbled 10%.


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  1. collapse expand

    Seems no one will hold these people accountable
    Krugman is defending the dems , saying they are the party tough on banks, but most people dont trust Geither,Summers etal.
    Maybe the GOP is worse, but dont we deserve good? as opposed to bad and worse?
    Sad the NYTimes is too busy defending the dems that they won’t relly present the news
    They did a good detailed coverage of Enron, but not the banks

  2. collapse expand

    Since Goldman Sachs is the government I predict that this will go nowhere. Look for nothing more than a small fine and maybe a couple of years at Club Fed.

  3. collapse expand

    Hooray! Hooray! Hooray! Just heard the news and had to come on over and shout! OK, I haven’t READ anything yet, so I have no clue as to whether this is real or just another Shuck-and-jive con, but… WHEEEEEEEEE!! Even if the Vampire Squid escapes in the end, to rape and burn some more, the fact that this has come so far is… beautiful.

  4. collapse expand

    John Paulson… Paulson… is this a coincidence of name, or…?

  5. collapse expand

    We’ll see if this has any traction, considering the ex-Goldman people in the White House and the Fed, heck even in the SEC.

    Not holding my breath on this one, since they are to big to fail.

  6. collapse expand

    That has got to be just the tip of the iceberg. The scam I would like to see investigated is the triple A ratings given to these crap derivatives by Moody’s, etc. They had to know better. There must have been a payoff somewhere.

  7. collapse expand

    Rick,

    When is the MSM going to break the story of the fraud in the Gold and Silver markets committed by JP Morgan.

    Andrew Maguire & Adrian Douglas: Discuss What Could Be the Largest Fraud in History

    http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2010/3/30_Andrew_Maguire_%26_Adrian_Douglass.html

    • collapse expand

      I don’t think the two are attached.

      In response to another comment. See in context »
      • collapse expand

        How is AIG paying Goldman 100 cents on the dollar for CDS _not_ a bailout? And how is the Federal Reserve buying MBS paper to help these leeches not a violation of their charter, regardless of whether it’s their own balance sheet directly or via some ‘Maiden Lane’ sham?

        Better the economy crash honestly than “recover” by means of corruption, collusion and lies. BTW, consumer spending numbers come from folks having spare cash since they don’t bother paying their mortgage (knowing that the banks need to keep that paper on the books or else it’ll get marked to reality, rather than their internal fantasy). It’s all a f–king delusion, and I’m hoping this investigation is the first domino to be toppled, but it’s probably a nothingburger given the thoroughness of regulatory and legislative capture.

        In response to another comment. See in context »
  8. collapse expand

    Is this really happening? I’m not dreaming?

    Wow. Cool! The impossible is possible, after all.

  9. collapse expand

    Hello Rick,

    Goldman-Sachs wrote:”We certainly did not know the future of the residential housing market in the first half of 2007 anymore than we can predict the future of markets today. We also did not know whether the value of the instruments we sold would increase or decrease.”

    Then why the hell were they selling Abacus 2007-AC1 if they did not have some idea how it was going to perform? I am pretty sure that that disclaimer did not show up on any Goldman-Sachs prospectus. In 2007 they sold themselves as the Masters of the Universe and now they’re defense is that they were a bunch schlemiels.

  10. collapse expand

    Rick,
    Goldman may just prove to be a juicy hors d’oeuvres for the SEC. Merrill Lynch, UBS, Citigroup, and JPMorgan reportedly each engaged in this kind of transaction, known on the Street as The Magentar trade for the hedge fund that perfected it and executed 30 times, according to ProPublica. Here’s the link: http://www.propublica.org/feature/all-the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble

    Let the games begin!

  11. collapse expand

    This script has been written and approved, we are all being played!!

  12. collapse expand

    A blind man could have seen this (the residential housing market crash) coming. Legislation and pressure from Washington artificially inflates a market by bringing in a slew new buyers qualified or not, rules of supply and demand cause prices skyrocket.( I am sure I am not the only one who remembers the barrage of ad’s no money down, no income verification required, interest only etc. etc.) The result is we had a mortgage market in the trillions full of bad loans.(and they the big’s knew it) So what does Wall St do ? Pass on this risk in the form of new snazzy CDO’s. The sad part is long before we got to the crash the MBA’s on the street knew this was coming and rather then do the right thing by putting a stop to bad business and take their losses, they dump! I predicted to friends when it all came apart this would not be over till we see a perp walks out of the glass towers on Wall Street. i was so wrong! Civil suits, fines, more back room deals between Washington and the money, maybe a chunk red meat in the form of a low level V.P or two and the greatest white collar crime in history will be history.

  13. collapse expand

    Erin Burnett on CNBC is in full damage-control mode. Her main talking point has become, “The S.E.C. didn’t find much if this is all they got.” The specific wrong-doer with the e-mail trail was not well-known; Burnett spins that as damning to the S.E.C.

    CNBC is also dragging out red herring after red herring. One of them is “the timing of this.”

    They also want to point out that “This didn’t affect Main Street, it’s only big boys trading with other big boys.” As if pension plans that bought the investments didn’t do so with Main Street money.

  14. collapse expand

    I must be dreaming…goldman busted…blackwater executive indicted and McConnell blocks Wall Street Reform debate. I feel giddy…someone break out the champagne.

  15. collapse expand

    I do not understand why everyone in the comments is so happy about this. This really means absolutely nothing. Civil fraud charges- who cares? What is the worst that will happen? A possible disgorgement of some of the profits earned by the corporation (and probably not from the people who actually committed the fraud)?

    The only way to produce a deterrent effect for this sort of fraud is criminal prosecution. Let these animals go and party it up in the federal pen for a couple of decades.

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    I am an attorney in Southern California, and a frequent writer, speaker and consultant on health care policy and politics. To that end, I am active member of the Association of Health Care Journalists. Based in beautiful Santa Monica, California, I'm very pleased to have the opportunity to be a contributing editor to True/Slant. I've recently finished a book designed to make the health care debate understandable to the average reader, and expect it to be out in the next five months or earlier. In my 'spare time', I continue to write for television and, occasionally, for comic books.

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