From the New York Times, but breaking just now on MSNBC, too:
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.
The move marks the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market. Goldman itself profited by betting against the very mortgage investments that it sold to its customers.
snip
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, which were the subject of an article in The New York Times in December, initially protected Goldman from losses when the mortgage market disintegrated and later yielded profits for the bank.
Full NYT article here:
http://www.nytimes.com/...
This is great news. I'll update as more comes in. Cheers.
more: Fabrice Tourre, a VP at Goldman who helped invent and sell the accusedly fraudulent 'instrument'.
The complex financial instrument in question is called the Abacus 2007-AC1. Note the irony in naming it after an ancient counting tool.
UPDATE 1: h/t to blonde moment, who found the SEC's press release. An excerpt:
The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.
"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, Director of the Division of Enforcement. "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."
full SEC press release here:
http://www.sec.gov/...
UPDATE 2: from the comments, bob zimway and CDH in Brooklyn both report that Goldman Sachs is down more than 12% 15% (!) today since the news broke. bwahahaaa.
link to GS plummeting stock article (h/t mcjoan's Front Page Daily Kos Story): http://www.businessinsider.com/...
follow GS stock price here: http://www.marketwatch.com/...
UPDATE 3: (ACTION!) Just got an email from POTUS titled Wall Street Reform. It doesn't mention the GS fraud charges, but it urges us to sign a petition for Wall Street reform. Sign it here:
http://my.barackobama.com/...
Great timing! Here's most of the email:
Eric --
It has now been well over a year since the near collapse of our entire financial system that cost the nation more than 8 million jobs. To this day, hard-working families struggle to make ends meet.
We've made strides -- businesses are starting to hire, Americans are finding jobs, and neighbors who had given up looking are returning to the job market with new hope. But the flaws in our financial system that led to this crisis remain unresolved.
Wall Street titans still recklessly speculate with borrowed money. Big banks and credit card companies stack the deck to earn millions while far too many middle-class families, who have done everything right, can barely pay their bills or save for a better future.
We cannot delay action any longer. It is time to hold the big banks accountable to the people they serve, establish the strongest consumer protections in our nation's history -- and ensure that taxpayers will never again be forced to bail out big banks because they are "too big to fail."
That is what Wall Street reform will achieve, why I am so committed to making it happen, and why I'm asking for your help today.
snip
Reform will provide crucial new oversight, give shareholders a say on salaries and bonuses, and create new tools to break up failing financial firms so that taxpayers aren't forced into another unfair bailout. And reform will keep our economy secure by ensuring that no single firm can bring down the whole financial system.
With so much at stake, it is not surprising that allies of the big banks and Wall Street lenders have already launched a multi-million-dollar ad campaign to fight these changes. Arm-twisting lobbyists are already storming Capitol Hill, seeking to undermine the strong bipartisan foundation of reform with loopholes and exemptions for the most egregious abusers of consumers.
I won't accept anything short of the full protection that our citizens deserve and our economy needs. It's a fight worth having, and it is a fight we can win -- if we stand up and speak out together.
So I'm asking you to join me, starting today, by adding your name as a strong supporter of Wall Street reform
Thank you,
President Barack Obama
UPDATE 4: An excellent point regarding the Goldman Sachs Fraud Charges from Giles Goat Boy in the comments:
Best thing about this...
It's easy to understand. It can be explained in a couple sentences. Average Joe doesn't need an accounting degree to see what they did: They stacked the deck. Everyone who ever played poker will get it.
UPDATE 5: Catte Nappe has been tracking online Wall Street reaction to the news, and they seem to be freaking out! Here's a few of the comments s/he's found:
...The question now is whether this is isolated to Goldman, or was pervasive throughout the financial industry. Investors clearly are scared — Goldman’s shares are plunging steeply, but other financial shares are dropping too.
Lord I pray schemes like this didn't occur at other dealers and structured products desks. The last thing we want to do is fuel Main Street's anger toward Wall Street.
SEC Enforcement Director Robert Khuzami refused to say how widespread his investigation is.....All indications are that, in the late stages of the subprime mortgage bubble, the kind of alleged fraud identified in the complaint was far more common than is typically acknowledged....Another reason why we can expect a lot more cases to come is that the SEC unit that investigated the indictment, Structured and New Products, was only recently created solely to probe dodgy derivatives deals. (from Newsweek blog)
Counterparty risk concerns rattled investors and left them wondering whether other firms may see similar charges, said one investment manager. Those worries fed through to the interest rate swaps market, which is a useful proxy for perceptions of the risk involved in trading with the financial firms who use those instruments. (WSJ)
"The question is, has the SEC discovered what may have been a common practice across the industry? Is this the tip of the iceberg?" said Bill Larkin, a portfolio manage at Cabot Money Management. (WSJ)
UPDATE 6: From the comments, Bloke comes to a fascinating, if perhaps a bit overly optimistic conclusion:
Goldman is Done
Golden rule on Wall Street:- Do not defraud your clients.
Most here on Kos won't believe this but there is a good deal of trust on wall street (and not just "I trust that I am getting properly screwed on this deal"). Traders will exchange billions of dollars based on word of mouth and honor. (though these days they do tend to tape record them).
Investors buy billions of dollars worth of securities and equities based on trust, often on the promise that those same securities will be provided at a future date even if you don't have them in hand right now (naked short any one).
Goldman's BIG BIG problem is that as of right now they have a bright light shining on a clear case of defrauding clients in a $1 billion scam.
The reason the stock is plumeting is that right now the traders at other desks are asking if they can trust the next deal that a Goldmanite puts in front of them. At that point Goldman's cost of doing business increases several tens of baisis points. (translation it is going to cost them a bunch more money [interest] to borrow on the market) because counter parties are going to be much less willing to trust in Goldman and no one is going to want to purchase the next bond issue that they back. The civil penalties will with any luck be very stiff, but it is nothing compared to the loss of business revenue due to lack of trust.
UPDATE 7: Closing Bell Report: (4pm) Shares of Goldman Sachs are down 12.67%. That's billions of dollars in tumbling value. They are lucky the news broke on a Friday.
UPDATE 8: Arthur Delaney at The Huffington Post has a 'smoking gun' email sent by VP Fabrice Tourre in January of 2007:
"More and more leverage in the system, The whole building is about to collapse anytime now...Only potential survivor, the fabulous Fab...standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!"
full article here: http://www.huffingtonpost.com/...