Goldman Sachs Charged With Fraud

The NY Times article U.S. Accuses Goldman Sachs of Fraud

• Goldman Sachs, which emerged relatively unscathed from the financial crisis, 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.
• Goldman itself profited by betting against the very mortgage investments that it sold to its customers.
• 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....As the Abacus deals plunged in value, Goldman and certain hedge funds made money on their negative bets, while the Goldman clients who bought the $10.9 billion in investments lost billions of dollars.
• According to the complaint, Goldman created Abacus 2007-AC1 in February 2007, at the request of John A. Paulson, a prominent hedge fund manager who earned an estimated $3.7 billion in 2007 by correctly wagering that the housing bubble would burst.
• .. the deck was stacked against the Abacus investors, the complaint contends, because the investment was filled with bonds chosen by Mr. Paulson 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.
• Robert Khuzami, the director of the S.E.C.’s division of enforcement, said in a statement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”
• But when Goldman sold shares in Abacus to investors, the bank and Mr. Tourre only disclosed the ratings of those bonds and did not disclose that Mr. Paulson was on other side, betting those ratings were wrong.

From Jesse: http://jessescrossroadscafe.blogspot.com/2010/04/sec-formally-charges-goldman-sachs-with.html

• This is just the tip of the iceberg. The Wall Street Banks are knee deep in fraud.
  
  No one can obtain the kind of systematic returns that Goldman was producing without either cooking the books or engaging in some other frauds. That is the same 'tell' as the steady and outsized returns that Madoff is producing.
  
  Let's see if this goes any deeper, and if serious punishments and reforms result.
  
  The SEC can only enforce the Securities Laws, but cannot bring criminal charges. Certainly Goldman will be subject to civil lawsuits and discovery. But the real test of the Obama government will be any role that the Justice Department does or does not take in this. They could of course defer, using the show trials of the Financial Crisis Inquiry Commission as a rationale to take no action.
  
  This is blatant robbery, outright fraud, being conducted by an organization that is paying half the Congress and the Administration, and staffing key positions in the government with its employees.
  
  Meanwhile, the market manipulation continues...

On CNBC: http://www.cnbc.com/id/36595454

• Stocks skidded Friday, snapping a six-day winning streak, after the SEC shocked the market, charging Goldman Sachs with fraud over its handling of subprime mortgages.
  
  The market had already started in a sour mood as the latest batch of earnings were solid but fell short of the market's lofty expectations and consumer sentiment unexpectedly fell.
  
  "The market was going along pretty good. We were a little weak, that's for sure, but we had good news the other day from JPMorgan, great earnings today from Bank of America, and then for this to come out, really put a damper on the whole sector," Alan Valdez, vice president of Hilliard and Lyons, said on CNBC.