Goldman charged with sub-prime fraud involving Paulson, markets tumble

Goldman charged with sub-prime fraud involving Paulson, markets tumble


Goldman Sachs has been charged with fraudulently allowing legendary hedge fund Paulson & Co to pick investments for a residential mortgage backed security it was also shorting.

The news sent world stockmarkets tumbling by 2% from their day peak. By 16.19pm Goldman Sachs had fallen by 9.23% as the Securities and Exchange Commission (SEC) said it was investigating other investment banks on similar issues. The Dow Jones was down by 0.97%, the S&P 500 was down 1.45% and the FTSE 100 by 1.26%.

The SEC said that Paulson & Co, the hedge fund run by John Paulson which made billions from shorting sub-prime, was allowed to influence the choice of investments in a residential mortgage backed security (RMBS) it was actually betting against.

The RMBS losses amounted to $1 billion when the bubble burst.

In the charge the SEC director of the division of enforcement Robert Kuzhami said that 'the product was new and complex but the deception and conflicts are old and simple, 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.'

Aswell as the charge against Goldman Sachs itself one of its vice presidents Fabrice Tourre, who was responsible for structuring the relevant vehicle - known as ABACUS 2007-AC! - has also been charged. The SEC is alleging that Tourre knew of Paulson's short position. He allegedly told other investors that Paulson was backing the RMBS with $200 million when in fact his interests were aligned in the other direction.

Economist Mark Ostwald from Monument Securities described the news as a 'leftfield' event that would shock markets. 'The issue here is not about what the outcome of these proceedings will turn out to be, but rather that, like the first mooting of the 'Volcker rule' in late January, this is a left field event that jolts financial markets out of their complacency on the macro background, which in fact remains very adverse.'

source: citywire.co.uk