Traders and investors alike are catching their breath this weekend after federal regulators filed suit Friday against banking giant Goldman Sachs.
"This is the watershed event of the financial crisis," bank analyst Sean Egan said.
That's how Egan describes the Securities and Exchange Commission's lawsuit alleging fraud against Goldman, the most powerful and politically wired Wall Street house, reports CBS News Correspondent Tony Guida.
The SEC says that in February of 2007 Goldman Sachs created what it called "abacus," a basket of bonds based on mortgage-backed securities to sell to investors. But the SEC says Goldman failed to tell them some of the securities were chosen by a hedge fund manager named John Paulson, who was betting they would fall in value.
"You'd have to say right now the Goldman Sachs gold standard is very tarnished," Forbes' Neil Weinberg said.
Goldman calls the charges "completely unfounded in law and fact" and adds it "lost money" in the deal for which "extensive disclosure was provided."
Just nine days ago in its annual report, Goldman patted itself on the back with the CEO writing to investors "Our first priority is and always has been to serve our clients' interests."
"Nothing could look worse, nothing could look more hypocritical for Goldman Sachs right now than these type of charges," Weinberg said.
Investors lost a billion dollars in "abacus" in just nine months. The reason, says Egan, is that the ratings of the securities by Moody's and Standard & Poor's were worthless.
"Investors had good reason to assume these were safe securities - they're rated triple A and thought they were on par with the U.S. government," said Egan. "Obviously, they weren't. In fact, these securities were among of the junkiest of the junk."
This, says Eagan, may be the most important facet of the SEC lawsuit.
"It puts the spotlight on the massive, unmitigated, ongoing conflicts in the market," he said.
That the conflict that Moody's and S&P are paid to rate investments by the same firms that create them. Unfortunately, says Eagan, there's nothing in the financial reform act that will correct that. What is needed, he says, is someone at the table looking out for investors, a sort of consumer advocate when deals like "abacus" are created.
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