US AUTHORITIES accused Goldman Sachs of fraud yesterday over a subprime mortgage security that caused $1 billion-plus (€740 million) in losses to investors in the toughest regulatory response so far to the excesses of the credit-bubble era.
News of the civil action by the Securities and Exchange Commission wiped more than $12 billion off Goldman’s market value, cast doubt over the future of the bank’s leadership team and business model and rocked other Wall Street banks.
In the first of what promises to be a series of actions over banks’ role in the financial crisis, the SEC accused Goldman and one of its vice-presidents of failing to disclose that the hedge fund Paulson Co had a major role in creating a collaterised debt obligation, a security that was backed by subprime mortgages, in 2007.
Goldman denied the charges and vowed to “vigorously contest them and defend the firm and its reputation”.
But news of the SEC charges knocked its shares and intensified speculation over the position of Lloyd Blankfein, its chief executive. The SEC said Goldman’s “senior-level management” approved the CDO but did not name any executives.
In afternoon trading, Goldman shares were down nearly 12 per cent to $162.18 – above the $115 at which Warren Buffett, who injected $5bn into the bank in the crisis, has the right to buy.
The plunge in Goldman’s stock dragged down shares in other banks amid fears the SEC’s months-long investigation into Wall Street’s subprime dealings will target other institutions.
The Dow Jones Industrial Average was also in the red, falling more than 1 per cent by early afternoon.
The civil complaint alleges that Goldman and Fabrice Tourre, one of its vice-presidents, hid from investors the fact that Paulson Co, which has not been charged, had a heavy hand in influencing the composition of the loans that made up the synthetic CDO. Mr Tourre could not be reached.
“The product was new and complex but the deception and conflicts are old and simple,” said Robert Khuzami, SEC director of enforcement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio.”
Within nine months of the creation of the CDO, 99 per cent of its loans had been downgraded, yielding Paulson Co a profit of $1 billion. Investors around the globe including IKB, which became the first casualty of the credit crisis in July 2007, lost $1 billion, the complaint said.
Goldman made $15 million–$20 million from the CDO, according to the SEC, and a further $841 million when ABN Amro, the Dutch bank that had taken on the risk associated with a tranche of the CDO, had to pay out. Most of the ABN Amro payment went to Paulson Co, according to the SEC. – (Copyright The Financial Times Limited 2010)
