Excerpt:
On Friday, almost two years after the financial meltdown that began on Wall Street and reverberated throughout the U.S. economy, a lawsuit has been filed by the Securities and Exchange Commission (SEC) against Goldman Sachs, alleging that the behemoth financial institution engaged in financial fraud.
According to the AP, the charges against Goldman relate to a complex investment tied to the performance of pools of risky mortgages known as collateralized debt obligations (CDOs).
In a complaint filed Friday, the Securities and Exchange Commission alleged that Goldman marketed the package to investors without disclosing a major conflict of interest: The pools were picked by another client, a prominent hedge fund that was betting the housing bubble would burst.
Goldman then sold the package to investors like foreign banks, pension funds and insurance companies, which would profit only if the bonds gained value.
The SEC said Goldman failed to tell investors that Paulson & Co, one of the world’s largest hedge funds, paid Goldman Sachs to structure a transaction in which it could take speculative positions against mortgage securities chosen by the fund, the commission said in a statement.
The focus of the SEC case, an investment vehicle called Abacus 2007-AC1, was one of 25 such vehicles that Goldman created so the bank and some of its clients could bet against the housing market. The deal, which took place during a massive mortgage meltdown in 2007 and as the country was about to fall into a brutal recession, was said to have cost investors around $1 billion. Paulson in turn bought insurance against the deal and when the securities later tanked, losing almost all of their value, Paulson has acknowledged reaping a $3.7 billion profit by betting against the housing market as it nose dived in 2006 and 2007.
The charges may unleash a torrent of lawsuits, and signal that the government is prepared to file more lawsuits related to the overheated market that preceded the financial crisis, experts said.
“This is just the tip of the iceberg,” said James Hackney, a professor at Northeastern University School of Law. “There are a lot of folks out there in different deals who played similar roles, and once it starts building steam, plaintiffs’ lawyers will figure out this is where the money is and there should be a lot of action.”
Part of the action in the coming months may come in the form of a financial reform bill that President Obama and congress is preparing to push through the House and Senate in what looks to become a heated battle on the scale of health care insurance reform.
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