Goldman Charges May Spur Finance Reform
The Dow Jones dropped 125 points Friday after news of fraud charges being levied against Goldman Sachs - the one bank that emerged relatively unscathed from the housing crisis.
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."
Copyright 2010 CBS. All rights reserved. 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."
Goldman Sachs Defrauded Investors, SEC Charges
Obama: Financial Reform Must Address Derivative Markets
Treasury Dept. to Cap Bailed-Out Execs' Pay
MoneyWatch: SEC Charges Goldman Sachs
Exclusive: Is Goldman Sachs Playing Fair?
The Power of Goldman Sachs
Insight into Goldman Sachs
Blog: Goldman Sachs' Revolving Door
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."
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And you think the government doesn't cook their books.
Regrettably, the so-called Free Enterprise System invariably is abused, and usually turns into the;
Free-to-Rape-The-Consumer/Public System.
Strictly-monitored laws, regulations, and if necessary, controls to remind greedy, selfish 'human nature' ...
...not to lie, cheat and steal.
All this is very sad and should raise self-introspective questions for all who have a conscience.
If there's one thing you can count on Republicans for, it's doing the same thing over and over again even after it's proven a failure.
Odd timing with reform (haha) bill in Congress. These are allegations where are the actual charges. This could be a shake down by some members of Congress to get the reform bill passed. Should go back so commercial and investment banks are separated for they have two totally different mind sets. If charges filed I hope GS take a strong defense. Who allowed them to get into the sub prime game, who maybe pushed them into it. To keep the housing market strong wave massive profit potential and almost all corporation will fall for it. Eventually someone was going to be caught holding the bag.
==========================
Give me a break, no one "pushed them into it."
If you are talking about the Reinvestment Act, about 80 percent of toxic mortgages out there were lent out by private institutions not subject to such laws or "pushing" as you may put it.
The Free Marketeers ala Green Span and Milton Freidman are going to have to deal with a future of strict regulation (like those put in place after the Great Depression) or face no future except decline. Your side of the argument lost when the Free Market ate its self like Ouroboros. Unfortunately, those who paid the most for this vicious cycle were Main Street and the rest got off without a bruise.
Due to the general decline in our standards of honesty, decency, etc, as corruption becomes more pervasive in all sectors of our society, we are in danger of losing our freedoms.
The writing is on the wall.
All corruption such as witnessed within these past decades, must be pursued vigorously, and the responsible individuals MUST BE severely punished.
We have evolved into a non-productive society that measures success in terms of possessing more and more dollars and material items, which as we bear witness, is unsustainable.
The investment bankers and other 'financiers' hardly serve as contributing Americans. They are classified as takers and parasites who have no conscience in regard to draining our resources and our money, as long as it benefits them.
Most of our jobs and 'careers' are those by which we never get our hands dirty. We only want clean 'desk jobs'.
Lastly,and with reference to another very ugly area,
"Let other people's children ie, the poor and uneducated, serve in our military and fight and die for (selfish, greedy, upper-class) us!"
The forgoing is a concise, albeit incomplete warning, to quickly rein in not only the criminal economic 'financier'/sociopaths who continue to destroy us financially along with vigorous prosecution and punishment thereof, but also to teach our younger generation that it must adopt new, unselfish and honest values.
The writing is on the wall!
REpubs will have to support some kind of reform Bill or face a quick reversal of voter support in Nov.
If what GOldman did was illegal, itshows that moreoversightis needed to prevent. If what they did was LEGAL, reform is imminent.
BTW. This is not a difficult concept for the public to grasp. A front store selling bad investments and touting them as good; a backroom store sellinghedge funds AGAINST what is being touted in the front room......and Goldman making money on every bit of it (sales and hedge).