Regulator charges Goldman Sachs with fraud
Regulator charges Goldman Sachs with fraud
Craig McMurtrie
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Toxic mortgages: when the market crashed, Goldman investors lost heavily while the bank made a profit
(AFP: Chris Hondros)
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.
– Goldman Sachs executive Fabrice Tourre
Wall Street has been rocked by news that Goldman Sachs has been charged with defrauding investors in the lead-up to the financial crisis.
The bank is accused of failing to tell clients that a hedge fund betting against the mortgage market had a hand in picking a portfolio of mortgage securities they were being asked to invest in.
US regulators say the hedge fund had an incentive to choose toxic subprime mortgages.
When the market collapsed, investors lost heavily while the hedge fund profited by a billion dollars.
The Wall Street giant's shares plunged on the news, with analysts speculating that US regulators could widen their net to snare other banks.
"Today we charged Goldman Sachs with fraud, in connection with the structure and marketing of a synthetic CDO in April of 2007," director of the Securities and Exchange Commission enforcement division, Robert Khuzami, said.
A synthetic collateralised debt obligation (CDO) is a mortgage backed security, and Goldman Sachs was not alone in using them.
The SEC says the bank told its clients that the make-up of the investment portfolio was picked independently.
Mr Khuzami says they did not tell them that in fact a hedge fund betting against the mortgage market was heavily involved.
"Undisclosed in the marketing materials was that a large hedge fund, Paulson and Company, played a significant role in the selection of the portfolio selection process and had an economic incentive to choose what it viewed as the poorest quality triple B rated mortgage securities," he said.
The 31-year-old Goldman Sachs executive in charge of the deal, Fabrice Tourre, has also been charged.
As financial markets were about to enter meltdown he wrote in an email: "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."
When the subprime mortgage crisis hit and financial markets crashed, Goldman investors lost heavily while the bank made a profit and the hedge fund walked away with an estimated $1 billion.
Goldman Sachs was later bailed out by US taxpayers.
News of the civil fraud charge stung Wall Street traders like Warren Meyers.
"Obviously they had all this information as of this morning. They could have done this pre-market and [made] it a little calmer," he said.
"I think the fact they came out mid-morning during trading sends a real splash and shockwave out to everyone. Maybe it's a wake up call: 'you better check yourselves and make sure you're clean.'"
In a statement, Goldman Sachs says the charges are "completely unfounded in law", and it promises to "vigorously contest them".
Andrew Ball, from Whitton Investment Trusts, says the case will centre on whether people lost money because Goldman Sachs failed to warn them of the risks.
"The key things are clearly going to be, which I have to leave the lawyers to sort out, did they fail to make a disclosure and if they did was that failure actually material in causing the losses," he said.
But the news rocked Wall Street and analysts warn this could just be the start. The US Securities and Exchange Commission says it is still investigating.
"We're going to continue to look at products and practices across the spectrum that are implicated by the financial crisis and if we find structures or deals or arrangements that share similar profiles to this one as well as other structures or transactions that violate the securities laws, we will pursue them aggressively," it said.
Observers say this puts more pressure on the US Justice Department to bring possible criminal charges in the fallout over the financial crisis and the SEC move could also strengthen the White House push for sweeping financial regulation.
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