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VIDEOGoldman Sachs Fraud: A Slap on the Wrist?
By
Jarrod Dicker and Matt Theal Apr 16, 2010 1:30 pm
Charges that the company misled investors in a CDO structured by John Paulson could end up as just another ding against Goldman's mighty armor.
Media outlets are having a field day with breaking news that the SEC has filed charges against Goldman Sachs (GS) for alleged fraud in mortgage investments that were secretly designed to fail.
According to the SEC the key instrument used was called Abacus 2007-AC1.
The complaint alleges that Abacus 2007-AC1 was created by Goldman Sachs to appease hedge fund investor John Paulson's desire to wager against the housing market. Goldman allowed Paulson & Co. to hand-select suspected mortgages Paulson believed would fail and then packaged those bonds into Abacus, a collateralized debt obligation (CDO). Abacus was then sold to foreign investors, pension funds, insurance companies, and other hedge funds.
Goldman and Paulson took the other side of the trade. Clients of Goldman who took the trade lost $1 billion while Paulson & Co. made an estimated $1 billion on it in 2007.
The investment firm purportedly told investors that the funds were chosen by an independent manager.
In the civil suit, the regulators have taken action against Goldman Sachs the company, as well as singling out Vice President Fabrice Tourre who was responsible in helping create and sell the default investment.
Tourre allegedly chose to exclusively disclose the ratings of the bonds included in the CDO and failed to reveal to investors that Paulson was on the other side betting against the ratings.
According to the New York Times, “Mr Tourre at one point complained to an investor who was buying shares in Abacus that he was having trouble persuading Moody’s to give the deal the rating he desired.”
Needless to say, Tourre will be the sole biter of the bullet in this case. So far, no charges have been filed against Paulson.
So what will happen next?
Goldman Sachs stated, “The SEC’s charges are completely unfounded in law and fact and [they] will vigorously contest them and defend the firm and its reputation.”
Paulson & Company released this statement:
According to the SEC the key instrument used was called Abacus 2007-AC1.
The complaint alleges that Abacus 2007-AC1 was created by Goldman Sachs to appease hedge fund investor John Paulson's desire to wager against the housing market. Goldman allowed Paulson & Co. to hand-select suspected mortgages Paulson believed would fail and then packaged those bonds into Abacus, a collateralized debt obligation (CDO). Abacus was then sold to foreign investors, pension funds, insurance companies, and other hedge funds.
Goldman and Paulson took the other side of the trade. Clients of Goldman who took the trade lost $1 billion while Paulson & Co. made an estimated $1 billion on it in 2007.
The investment firm purportedly told investors that the funds were chosen by an independent manager.
In the civil suit, the regulators have taken action against Goldman Sachs the company, as well as singling out Vice President Fabrice Tourre who was responsible in helping create and sell the default investment.
Tourre allegedly chose to exclusively disclose the ratings of the bonds included in the CDO and failed to reveal to investors that Paulson was on the other side betting against the ratings.
According to the New York Times, “Mr Tourre at one point complained to an investor who was buying shares in Abacus that he was having trouble persuading Moody’s to give the deal the rating he desired.”
Needless to say, Tourre will be the sole biter of the bullet in this case. So far, no charges have been filed against Paulson.
So what will happen next?
Goldman Sachs stated, “The SEC’s charges are completely unfounded in law and fact and [they] will vigorously contest them and defend the firm and its reputation.”
Paulson & Company released this statement:
As the SEC said at its press conference, Paulson is not the subject of this complaint, made no misrepresentations and is not the subject of any charges. While Paulson purchased credit protection from Goldman Sachs on securities issued under the ABACUS ABS CDO program, we were not involved in the marketing of any ABACUS products to any third parties. ACA as collateral manager had sole authority over the selection of all collateral in the CDO, securities of which were subsequently rated AAA by both S&P and Moody's. Paulson did not sponsor or initiate Goldman's ABACUS program, which involved at least 20 transactions other than that described in the SEC's complaint.The SEC suit is a civil one, so no criminal charges have been places against Goldman Sachs as of yet. The outcome will undoubtedly result in a proverbial slap on the wrist along with a heavy monetary fine that will unlikely match the profits that Goldman (and Paulson) gained from the faulty deal.
No positions in stocks mentioned.
