rssSEC Charges Goldman Sachs Over Subprime-Tied Product
Friday, April 16, 2010 at 1:45 pm
- 40 Comments
Today, the Securities and Exchange Commission charged Goldman Sachs and one of its vice presidents with selling clients a financial instrument that another client had purposefully designed to fail and had shorted, betting on its collapse:
The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.
To simplify how the gambit worked: The hedge fund Paulson & Co. (no relation to former Treasury Secretary Henry Paulson) handpicked mortgage-backed securities that were doomed to stop performing, being backed with subprime mortgages, and Goldman packaged them into a kind of bond. Paulson bet against the bond, with Goldman acting as the broker; at the same time, Goldman sold the bond to other clients without disclosing that Paulson had engineered the bond to fail.
The SEC filing notes that those other clients lost $1 billion. Goldman had no direct stake in the success or failure of the CDO. It made money either way. Felix Salmon explains:
The scandal here is not that Goldman was short the subprime market at the same time as marketing the Abacus deal. The scandal is that Goldman sold the contents of Abacus as being handpicked by managers at ACA when in fact it was handpicked by Paulson; and that it told Abacus that Paulson had a long position in the deal when in fact he was entirely short.
Goldman Sachs has lost more than $10 billion in market capitalization today, in the wake of these revelations. Good. It can go long markets and it can go short markets. But it can’t lie to its clients. That’s well beyond the pale.
One of the reasons the markets must be so spooked about Goldman? This sort of deal seems to have been ubiquitous during the run-up to the housing crash. This is just one SEC filing. My guess is that more will be forthcoming.
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40 Comments
Pingback posted April 16, 2010 @ 2:21 pm
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Pingback posted April 16, 2010 @ 3:52 pm
[...] “This is just one SEC filing [i.e., the charges against Goldman]. My guess is that more will be forthcoming.” –Annie Lowrey, Washington Independent [...]
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[...] SEC Charges Goldman Sachs Over Subprime-Tied Product - The Washington Independent See all 161 blogs. Share and Enjoy: [...]
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Pingback posted April 16, 2010 @ 8:51 pm
[...] the handful of Americans who haven’t read this, here’s a good bare-bones explanation of what the firm allegedly did from Annie Lowrey of The Washington Independent: “The hedge fund Paulson & Co … [...]
Pingback posted April 17, 2010 @ 12:16 am
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Comment posted April 17, 2010 @ 7:19 am
Glodman Sachs was one of the few merchant banks which appeared to have survived the global financial crisis. It seemed to have mainly escaped the exposure to the CDOs which other banks has been exposed to. Now it is clear why they were able to escape the clutches of the GFC in its first beginnings. This will be one of the greatest tests their organisation has every faced.
Pingback posted April 17, 2010 @ 9:29 am
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[...] SEC Charges Goldman Sachs Over Subprime-Tied Product - The Washington Independent [...]
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Comment posted April 18, 2010 @ 2:49 am
It makes me sick that these people got away with scaming so many people. I hope they get convictions, and those convictions lead to changes that make sure this type of thing never happens again.
Pingback posted April 18, 2010 @ 5:58 am
[...] SEC Charges Goldman Sachs Over Subprime-Tied Product - The Washington Independent [...]
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[...] SEC Charges Goldman Sachs Over Subprime-Tied Product « The … [...]
Pingback posted April 19, 2010 @ 1:27 am
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Comment posted April 20, 2010 @ 9:31 pm
Type your comment here.Predatory Lending is a major contributor to the economic turmoil we are currently experiencing.
Here is an example of what I am talking about:
Scott Veerkamp / Predatory Lending (Franklin Township School Board Member.)
Please review this information from U.S. Senator Jeff Merkley regarding deceptive lending practices:
“Steering payments were made to brokers who enticed unsuspecting homeowners into deceptive and expensive mortgages. These secret bonus payments, often called Yield Spread Premiums, turned home mortgages into a SCAM.”
The Center for Responsible Lending says YSP “steals equity from struggling families.”
1. Scott collected nearly $10,000 on two separate mortgages using YSP and junk fees. 2. This is an average of $5,000 per loan. 3. The median value of the properties was $135,000. 4. Clearly, this type of lending represents a major ripoff for consumers.
http://merkley.senate.gov/newsroom/press/releas…
Comment posted May 26, 2010 @ 5:39 pm
Maybe we should try some humor
http://www.baitandswitchtv.com/comedy2.html
Pingback posted June 22, 2010 @ 1:02 am
[...] 2.SEC Charges Goldman Sachs Over Subprime-Tied Product « The The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge… [...]
Pingback posted June 25, 2010 @ 7:13 pm
[...] The bill will stop banks from hedging against trades performed on behalf of clients — in reaction to the Goldman Sachs Abacus scandal. [...]
Comment posted October 13, 2010 @ 9:58 am
It is just plain commonsense that such an attitude is neither dignified nor
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