Last week, the Securities and Exchange Commission (SEC) accused Goldman of “defrauding investors by mis-stating and omitting key facts” about a product based on subprime mortgage-backed securities. A civil suit has been filed against Goldman.
The commission said Paulson and Company, one of the world’s largest hedge funds owned by John Paulson, paid Goldman Sachs to structure a transaction in which it could take short positions against mortgage securities chosen by the fund. The SEC said that Goldman failed to disclose this material fact to the buyers of the mortgage securities.
The deal, which took place during a massive mortgage meltdown in 2007, was said to have cost investors around US$1 billion ($1.37 billion). Ironically, Goldman also lost $90mil on the deal as they were left with positions themselves.
Goldman rejected the charges and said it would contest them. They said they had a duty to Paulson to keep the information confidential.
If the repackaging of such deals is wrong, it might mean other banks would also be investigated as the repackaging and sale of CDOs (and synthetic CDOs) had been widespread among all the investment banks. Thehas reportedly asked for information from Deutsche Bank, , Barclays and Credit Suisse.
WSJ analysed that the real impact of the SEC charges is likely to be political, as it comes at a time of the Senate debate over financial reform. The political class could be looking for legal cases to prove its preferred explanation that the entire mess was Wall Street’s fault and use it to lobby for financial reform.
Other parties have been quick to jump on the bandwagon.
Regulators in Germany and the UK are considering whether to take legal action against Goldman Sachs.
Both governments had to bail out banks that lost hundreds of millions of dollars on investments marketed by Goldman, in Britain’s case Royal Bank of Scotland through its acquisition of parts of ABN Amro and in Germany’s case German bank IKB Deutsche Industriebank AG.
Insurance giant AIG may also pursue Goldman Sachs on losses from six billion dollars of insurance deals similar to those that prompted recent SEC fraud charges.