The stock market had its first major speedbump in months with the major indexes down between -1% and -1.5% on news that the SEC has charged Goldman Sachs (GS) with fraud. Goldman itself took a severe tumble, dropping by double-digits on the news. Government-run Fannie Mae (FNM) and Freddie Mac (FRE) got swept up in the declines, as did other top Wall Street banks. JP Morgan (JPM) shed as much as 5%, and Bank of America (BAC) was tracking down about 4% on the day.
Here are the details of the GS mess: Goldman Sachs and one of its vice presidents have been charged (in a civil lawsuit, mind you) with defrauding investors by misstating and omitting key facts about a financial product related to subprime mortgages – specifically the ABACUS 2007AC1, a collateralized debt obligation. The SEC is claiming that Goldman Sachs failed to disclose the role of a major hedge fund, Paulson & Co., in the portfolio selection process – and most damning of all, that the hedge fund had taken a short position against the CDO.
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So in plain English, Goldman was selling people a product that was being run by folks betting against it. Not exactly something to be proud of. Making matters worse is that Paulson & Co. generated billions of dollars in profit in 2007 from bets against CDOs while the bottom was falling out of the market. That’s not sitting well with people who are still rebuilding their portfolios or living in a house that is worth tens of thousands less than the original mortgage they took out.
Of course, it must be noted that Goldman Sachs and Paulson didn’t single handedly cause the financial crisis of 2007 and 2008. Other firms also made huge gains in similar trades as the housing market imploded, and their collective actions triggered a global financial crisis.
But it’s going to be awful hard for regulators, politicians and the American public to have sympathy with that argument. Chances are criminal cases could be coming down the pike for GS execs, and perhaps even harsher regulations than have already been speculated on for the financial sector.
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