Reply #30: Goldman accused of subprime fraud MORE JUICY NEWS

[Demeter]

http://www.ft.com/cms/s/0/0e4a7b38-496a-11df-9060-00144feab49a.html

US authorities on Friday accused Goldman Sachs of securities fraud that caused investor losses of more than $1bn, in the toughest regulatory crackdown so far on the excesses of the credit-bubble era.

News of the civil action by the Securities and Exchange Commission wiped more than $12bn off the market value of Wall Street’s most prestigious bank, cast doubt over the future of its leadership team and business model, and rocked other banks.

The SEC move came as President Barack Obama made a final push for financial reform in the Senate next week. “Wall Street titans still recklessly speculate with borrowed money,” he told supporters. “We cannot delay action any longer.”

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 in 2007 the hedge fund Paulson & Co had a major role in creating a collaterised debt obligation, a security backed by subprime mortgages, so that it could bet against it.

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.

Goldman shares closed nearly 13 per cent lower to $160.70.

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 loans that made up the CDO. Mr Tourre could not be reached for comment.

“The product was new and complex but the deception and conflicts are old and simple,” said Robert Khuzami, SEC enforcement director. “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 $1bn. Investors around the globe including IKB, the German bank which became the first casualty of the credit crisis in July 2007, lost $1bn, the complaint said.

Goldman made $15m-$20m from the CDO, according to the SEC, and a further $841m 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.

Paulson & Co said it was not the subject of this complaint, made no misrepresentations and was not the subject of any charges.