Finally, some justice to these bastards:
Via the NYT:
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.
The suit also named Fabrice Tourre, a vice president at Goldman who helped create and sell the investment.
In a statement, Goldman called the S.E.C. accusations ācompletely unfounded in law and factā and said the firm would āvigorously contest them and defend the firm and its reputation.ā
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.
As the Abacus deal plunged in value, Goldman and a prominent hedge fund made money on their negative bets, while European investors like IKB and ABN Amro lost more than $1 billion, the S.E.C. said.
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.
Goldman let Mr. Paulson select mortgage bonds that he wanted to bet against ā the ones he believed were most likely to lose value ā and packaged those bonds into Abacus 2007-AC1, according to the S.E.C. complaint. Goldman then sold the Abacus deal to investors like foreign banks, pension funds, insurance companies and other hedge funds.
But the deck was stacked against the Abacus investors, the complaint contends, because the investment was filled with bonds chosen by Mr. Paulson, who is not named in the suit, 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.
āThe product was new and complex, but the deception and conflicts are old and simple,ā Robert Khuzami, the director of the S.E.C.ās division of enforcement, said in a statement. āGoldman 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.ā
In response Goldman Sachs says:
The SECās charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation.
Yeah, sure the accusations are unfounded. If I were a Goldman employee; I would be looking for a new job pronto.
From the SEC Press Release:
The SEC’s complaint alleges that after participating in the portfolio selection, Paulson & Co. effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure. Given that financial short interest, Paulson & Co. had an economic incentive to select RMBS that it expected to experience credit events in the near future. Goldman Sachs did not disclose Paulson & Co.’s short position or its role in the collateral selection process in the term sheet, flip book, offering memorandum, or other marketing materials provided to investors.
The SEC alleges that Goldman Sachs Vice President Fabrice Tourre was principally responsible for ABACUS 2007-AC1. Tourre structured the transaction, prepared the marketing materials, and communicated directly with investors. Tourre allegedly knew of Paulson & Co.’s undisclosed short interest and role in the collateral selection process. In addition, he misled ACA into believing that Paulson & Co. invested approximately $200 million in the equity of ABACUS, indicating that Paulson & Co.’s interests in the collateral selection process were closely aligned with ACA’s interests. In reality, however, their interests were sharply conflicting.
According to the SEC’s complaint, the deal closed on April 26, 2007, and Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing ABACUS. By Oct. 24, 2007, 83 percent of the RMBS in the ABACUS portfolio had been downgraded and 17 percent were on negative watch. By Jan. 29, 2008, 99 percent of the portfolio had been downgraded.
Investors in the liabilities of ABACUS are alleged to have lost more than $1 billion.
The SEC’s complaint charges Goldman Sachs and Tourre with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties.
Allow me to humbly submit that I hope that these bastards get exactly what is coming to them. I mean, these guy literally gambled as the stock market and by proxy; our economy went straight into the toilet. Ā Many people that I know; like my parents, lost a good deal of money on this stuff. Not only that, after the credit crises hit; G.M. ended up having to shed a bunch of expenses; and as a result, my parents lost their optical and dental insurance. That came as a indirect result of this Wall Street mess. So, as far as I am concerned; throw the book at these bastards.
Capitalism is one thing, heartless greed is another; and these bastards crossed that line, big time. š”
