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
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%.