Here's some cheery news for your Friday. The "great vampire squid wrapped around the face of humanity", Goldman Sachs, is being charged for a small part of its role in our economic disaster.
The Securities and Exchange Commission announced Friday civil fraud charges against the Wall Street powerhouse and one of its vice presidents. The agency alleges Goldman failed to disclose that one of its clients helped create - and then bet against - subprime mortgage securities that Goldman sold to investors.
Investors in the mortgage securities are alleged to have lost more than $1 billion, the SEC noted.
"The product was new and complex but the deception and conflicts are old and simple," Robert Khuzami, Director of the 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."
The Goldman client implicated in the fraud is one of the world's largest hedge funds, Paulson & Co., which paid Goldman roughly $15 million for structuring the deals in 2007, in which they bet against the subprime mortgage securities that Goldman was selling to investors.
The WSJ blog translates.
The crux of the charges against Goldman Sachs relate to a financial instrument the firm developed through discussions with hedge fund Paulson & Co. (Paulson & Co. was not named as a defendant in the SEC charges.)
According to the complaint, Paulson paid Goldman Sachs approximately $15 million for structuring and marketing this security — called ABACUS 2007-AC1 — in early 2007. The security let Paulson & Co. make bets against the residential real estate market, which the hedge fund believed was going to tank....
In other words, Paulson had an incentive to pick securities that would have tanked, since he was then going to bet that the value of these securities would fall. While that may sound strange to people, in and of itself it isn’t a problem. The problem, according to the SEC, comes in the form of Goldman not telling the guys that invested in ABACUS 2007-AC1 the role that Paulson had played in its construction.
It's possible someone from Goldman will go to jail (Update, or not, since these are civil charges.) There's short term pain for Goldman stocks and the Dow, but for the potential of there being just a little bit of justice for the people who created this mess, this is a ray of light.
You can also talk about this in ericlewis0's diary.