The Securities and Exchange Commission is no longer weak-kneed.
In one of the most astounding turns since the financial crisis began, the S.E.C. has sued Goldman Sachs, the most important and feared investment bank in the world. The Times points out that it’s the very first time any U.S. regulators “have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market.”
In a press release, the S.E.C. explains that Goldman built and sold off enormous mortgage investments that were, unbeknownst to its clients, explicitly designed to fail. It says that Paulson & Co., the immense hedge fund controlled by the billionaire John Paulson, paid Goldman to hand-pick mortgage bonds that he thought were going to tank. Those were bundled together into an instrument named Abacus 2007-AC1, which was sold to Goldman clients.
Mr. Paulson, and Goldman itself, bet against it. His wager against the housing market as it was collapsing is said to have made him $3.7 billion in 2007 alone.
“The product was new and complex but the deception and conflicts are old and simple,” Robert Khuzami, the S.E.C.’s 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.”
In other words, Goldman wasn’t just selling its clients cars with faulty brakes, as the cliche goes, and then taking out auto insurance. THe S.E.C.’s point is that Goldman secretly allowed Mr. Paulson to pick the faultiest brakes possible.
Among other things, according to a copy of the suit, it asks for “civil monetary penalties” and that Goldman “disgorge all illegal profits.”
Goldman vice president Fabrice Tourre, who the S.E.C. says was mainly responsible for 2007-AC1, is named in the suit as well. “The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab,” he wrote in a January 2007 email, according to the suit, “standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!”
Goldman did not respond to a request for comment, although a 23-word statement on its Web site says, “The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation.” A longer response that came later is here.
As it happens, in a letter to investors released last week, CEO Lloyd Blankfein said that the firm did not “‘bet against’ our clients.”
The post has been updated with additional analysis and Goldman’s comments.