The SEC Accuses Goldman Sachs of Fraud
As I noted here, I am swamped today, so I don't have time to say much about the SEC fraud accusation against Goldman Sachs. So let me turn it over to others. Here's a roundup of news and commentary on the accusation that Goldman Sachs engaged in fraudulent activity by devising securities it knew would fail, sold them to the public, and then made a killing by betting against them.
Here's a summary from the NY Times:
U.S. Accuses Goldman Sachs of Fraud in Mortgage Deal, NY Times: Goldman Sachs ... was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail. ... The suit also named Fabrice Tourre, a vice president at Goldman who helped create and sell the investment. ...
The instrument in the S.E.C. case, called Abacus 2007-AC1, was one of 25 deals that Goldman created so the bank and select clients could bet against the housing market. Those deals ... initially protected Goldman from losses when the mortgage market disintegrated and later yielded profits for the bank.
As the Abacus deal plunged in value, Goldman and a prominent hedge fund made money on their negative bets... According to the complaint, Goldman created Abacus 2007-AC1 in February 2007, at the request of John A. Paulson, a prominent hedge fund manager... Goldman then sold the Abacus deal to investors like foreign banks, pension funds, insurance companies and other hedge funds.
But the deck was stacked against the Abacus investors, the complaint contends, because the investment was filled with bonds chosen by Mr. Paulson, who is not named in the suit, as likely to default. Goldman told investors in Abacus marketing materials reviewed by The Times that the bonds would be chosen by an independent manager.
"The product was new and complex, but the deception and conflicts are old and simple," Robert Khuzami, the director of the S.E.C.'s division of enforcement, said in a statement. ...One of the most significant effects this suit will have from my perspective is how it will change the political atmosphere surrounding financial reform. This will further incite the public against the financial industry -- as it should -- and make it much more difficult for legislators to serve the interests of the financial industry. This will make it harder for legislators to vote against reform in order to protect campaign contributions, or for any other reason. Thus, in addition to what this says about the government's willingness to take on large financial companies, a positive step in and of itself, this should also help to pave the way for needed financial reform.
Here's more:
- Goldman's Abacus Lies (Felix Salmon)
- SEC: Goldman Is Actually a Vampire Squid (Curious Capitalist)
- Goldman Is Charged With Subprime Fraud (WSJ)
- SEC Charges Goldman with Fraud (The Baseline Scenario)
- SEC Suing Goldman for Fraud (Daniel Indiviglio)
- You Shot Me in the @#$! (Market Talk)
- Suing the Squid (The Economist)
- SEC Sues Goldman for Fraud (Naked Capitalism)
- Goldman Accused of Subprime Fraud (Financial Times)
- Three Questions About the Goldman Fraud Filing (Ezra Klein)
