The Securities and Exchange Commission said the Wall Street giant made huge profits by selling mortgage investments - collateralized debt obligations, or CDOs - that they knew would fail.
Within an hour, Goldman Sachs' stock plunged 13%, the biggest one-day drop in company history.
The government alleged Goldman misled investors on a particular portfolio of subprime mortgage securities dubbed "Abacus 2007-AC1." Investors were led to believe the portfolio was selected by an objective third party when, in fact, it was influenced by hedge fund manager John Paulson, whose firm, Paulson and Co., was betting the same portfolio would fail.
"What the government is objecting to is, you can't tell one group of investors 'This is something you ought to buy,' and then tell another group, 'This is something you really ought to sell,'" financial strategist Dick Bove told CBS News.
Goldman took in $15 million in fees for arranging the transaction, while its investors lost over a billion dollars that became profit at Paulson & Co.
Goldman immediately denied the allegations and vowed to defend its 140-year reputation.
Appearing on CBS' "The Early Show" this morning, Reuters Global editor at large Chrystia Freeland reiterated that the SEC charges are merely allegations, which the firm is forcefully saying are untrue.
What is central to the charges, Freeland told CBS News business and economics correspondent Rebecca Jarvis, is misrepresentation.
"What the SEC is alleging is Goldman didn't tell the full story to its investors - that Goldman allowed John Paulson to select what was going to be in these CDOs. Paulson actually is not accused of doing anything wrong. He says 'I didn't misrepresent this; I didn't sell this to anybody.'
"But Goldman didn't tell the people who were on the other side of the trade, putting it together. It's pretty easy to understand why if that happened that's something that the SEC should be involved in."
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The charges released Friday named one executive, Fabrice Tourre, who was a vice president in his late 20s when the alleged fraud was orchestrated three years ago.
Freeland said the significance of the SEC charging Goldman Sachs is "huge."
In addition to their reputation for being "the smartest, the richest," Freeland said the firm's members like to think of themselves as the "most virtuous."
"Someone once said, 'I don't want to be just another rich guy in New York,'" she recalled. "They want o be part of civil service, part of government, doing good, giving back." So for Goldman Sachs to be at the center of the SEC's investigation, she said, is "a big deal."
Freeland also said while it was purely speculative to suggest there might be additional charges higher up in Goldman's ranks, the charges will have a great impact on the financial reform debate.
"We have seen a real toughening of the position there," Freeland said. "Actually, they're talking now about saying firms should be banned from trading credit derivatives if they want to have government backing. That would be huge. That would be revolutionary on Wall Street."
"What do you think is the likelihood of that taking place - that financial firms will be much more harshly regulated in the future?" asked Jarvis.
"Well, I think now that there has been a lot of momentum behind the financial reform bill, and I think that that momentum is only going to increase," Freeland said. "The charges on Friday will give the Democrats who wanted a tougher bill a lot more energy."