Goldman Sachs Charged With Mortgage Fraud

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Goldman Sachs Group Inc. was sued by U.S. regulators for fraud tied to collateralized debt obligations that contributed to the worst financial crisis since the Great Depression. The firm’s shares tumbled as much as 16 percent and financial stocks slumped.

Goldman Sachs misstated and omitted key facts about a financial product tied to subprime mortgages as the U.S. housing market was starting to falter, the Securities and Exchange Commission said in a statement today. The SEC also sued Fabrice Tourre, a Goldman Sachs vice president.

The SEC alleged that Goldman Sachs, led by Chief Executive Officer Lloyd Blankfein, 55, structured and marketed CDOs that hinged on the performance of subprime mortgage-backed securities. The New York-based firm failed to disclose to investors that hedge fund Paulson & Co. was betting against the CDO, known as Abacus, and influenced the selection of securities for the portfolio, the SEC said. Paulson wasn’t accused of wrongdoing.

(Source: Bloomberg.com)


8 COMMENTS

  1. Simply: they are accused of both selling a security and shorting it at the same time

    An analogy: a doctor is treating a patient for what he knows is a terminal condition (and getting paid nicely for doing so) — on the side, he convince someone (for a fee) to sell life insurance to the patient.

  2. #1 you have absolutely no idea what you’re talking about. This is standard practice in the industry. If you sell a product, you do an opposite, similar but not the exact transaction, to hedge your position. It’s like a farmer who sells his future crop to a flour mill and then buys wheat futures to hedge his sale. There is nothing illegal nor immoral nor unethical about Goldman Sachs transactions. And to all you future comments, go do some homework and research hedging before you scream about Goldman Sachs.

  3. 1 & 4 are both wrong.

    1 is wrong because that’s not what happened. 4 is incorrect because there’s no point in hedging using the same asset; they may as well just not sell it.

    What they’re actually accused of is selling a CDO comprised of securitized subprime mortgages that were bundled by the hedge fund that intended to short it while misleading the investors who purchased the securities, making them think that the components of the security were selected by an independent, uninterested third party.

    When the subprime market imploded, the investors lost billions and the hedge fund earned billions. Goldman was already out of the game by then; they’d earned their commissions and fees long before.

  4. Dear #4

    This wasn’t simply a matter of hedging. They were accused not simply of betting against the investments, but influencing them to purchase the riskiest types of CDO’s (Collateralized Debt Obligations) that they hoped would fail.

    In #1’s analogy, it would be like the doctor “poisoning” the patient, and then selling life insurance.

  5. #1- what does it have to do with Jews — Goldman hasn’t been a Jewish firm for years.

    #4- a broker (being an agent) has a duty of loyalty to its customers – this is a well established common law principle — if such two-sided deals have been occuring they are illegal, and. To use your analogy with commodity futures, if the farmer sells his future crop to the flour mill, but knows the crop is already infested with a highly contagious something that will diminish the value, and then turns around and shorts the crop based on knowledge he doesn’t share – that would be fraud.

    Goldman allegedly misrepresented facts to both sides in order to make sales. That’s illegal. It wasn’t honest hedging, it was alleged fraud.

  6. You analogies are close but they are missing one important point. These are SYNTHETIC CDO’s. Goldman was not selling actual assets, they were matchmaking between people who wanted to bet whether a basket of mortgage-backed securities would go up down. It should have been obvious to anyone betting on either side that the party taking the other side of the bet would want to have some influence on the selection of the reference assets in the basket. I don’t think the long investors had any more of a right to choose those assets than Paulson did. This entire investigation is politically motivated. The administration is using the envy people feel for Goldman Sachs to distract the middle class from their unpopular policies.