David Kirkpatrick

April 16, 2010

SEC hits Goldman Sachs with fraud

I blogged on this very topic back in late December, and now the SEC is cracking down hard. As one  financial industry insider quoted in the second link says, “This is big.”

From the second link:

Goldman Sachs Group Inc was charged with fraud on Friday by U.S. securities regulators in the structuring and marketing of a debt product tied to subprime mortgages.

The Securities and Exchange Commission lawsuit alleges that Paulson & Co, a major hedge fund run by the billionaire John Paulson, worked with Goldman in creating the collateralized debt obligation, and stood to benefit as its value fell, costing investors more than $1 billion.

Fabrice Tourre, a Goldman vice president who the SEC said was principally responsible for creating the product, was also charged with fraud.

Paulson has not been charged. “Goldman made the representations here to the investors, Paulson did not,” SEC enforcement chief Robert Khuzami said on a conference call.

Goldman said in a press release that the SEC’s charges are completely unfounded in law and fact and it will vigorously contest them.

The lawsuit, filed in Manhattan federal court, marks a dramatic expansion of regulatory efforts to hold people and companies responsible for activity that contributed to the nation’s financial crises. It also comes as lawmakers in Washington debate sweeping reform of financial industry regulation.

December 23, 2009

Wall Street rigged the CDO market

Man, it’s easy to make money when you can create a bad investment out of whole cloth then bet against its success while selling it hand-over-fist to your unsuspecting clients. There ought to be some legal action in the form of civil suits from defrauded investors if nothing else.

Wall Street wonders why Main Street holds it in such contempt. Stories like this should make that dynamic easy to see.

From the link (bolded text my emphasis):

Mr. Egol, a Princeton graduate, had risen to prominence inside the bank by creating mortgage-related securities, named Abacus, that were at first intended to protect Goldman from investment losses if the housing market collapsed. As the market soured, Goldman created even more of these securities, enabling it to pocket huge profits.

Goldman’s own clients who bought them, however, were less fortunate.

Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm.

Goldman was not the only firm that peddled these complex securities — known as synthetic collateralized debt obligations, or C.D.O.’s — and then made financial bets against them, called selling short in Wall Street parlance. Others that created similar securities and then bet they would fail, according to Wall Street traders, include Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc., an investment company whose parent firm was overseen by Lewis A. Sachs, who this year became a special counselor to Treasury Secretary Timothy F. Geithner.

Also from the link:

“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”

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