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Goldman Sachs accused of sub-prime RMBS fraud

The US financial watchdog has charged Goldman Sachs and one of its vice presidents for defrauding investors over one of its sub-prime residential mortgage-backed securities in a civil suit filed today.

The Securities and Exchange Commission says Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio but told other investors that the securities were selected by an independent, objective third party.

It says the bank misstated and omitted key facts about the RMBS tied to sub- prime mortgages as the US housing market was beginning to falter.

The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation that hinged on the performance of sub-prime RMBS, known as Abacus

It says Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.

The SEC alleges that one of the world’s largest hedge funds, Paulson & Co, paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities based on a belief that the securities would fail.

Robert Khuzami, director of the division of enforcement at SEC, says: “The product was new and complex but the deception and conflicts are old and simple.”

It estimates investors lost around £650m from Abacus

Goldman vice president Fabrice Tourre, who the SEC says was principally behind the creation of Abacus, was also charged.

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  • Paul 19th April 2010 at 2:51 pm

    Grey Haired you are half correct. The fact is that the whole of the RMBS investors were driven by greed and blinded by the massive profits which they thought would last forever. The financial industry became too complicated and somebody was left holding the baby. Nobody cared a jot when the cash was rolling in. US regulatory bodies need jailing for allowing the whole episode to take place. It cannot be called a robbery as the assets were passed along the line. Once prices reach the levels they once were the investors will walk away. Greed ruled, simple as that

  • Gray Haired Underwriter 19th April 2010 at 2:18 pm

    Anon 9.24 Your response that this is ‘another sub-prime scandal’ misrepresents the issue. The fact is that Senior Staff memebers at GS have apparently committed an immense fraud. If this were a robbery it would be the largest in history but because it was on paper and between various banks it is nothing other than a scandal. The fact as that these people need to be put in gaol and the key should be thrown away. The only way to deal with such greed is to make it unbelieveably painful if you get caught – the only scandal is if they get away with it.

  • Paul 16th April 2010 at 9:24 pm

    Another sub prime scandal. Meanwhile the investors have written down billions from their balance sheets, the price of the secured asset has tumbled, levelled, and risen again. Before we know it the property prices will be back to where they were before the crisis and the crisis will be averted in terms of losses. Anybody who applies for a mortgage has the warning ‘your home may be repossessed if you do not keep up your mortgage payments’. Investors should have the ‘value of your investments can go down as well as up’ warning. As long as everybody understands this then no issue. Boom and bust, peak and trough etc.

  • Tom Cleary 16th April 2010 at 5:15 pm

    Oh what a tangled web we weave…
    It’s all coming out now.

  • ian camp 16th April 2010 at 5:12 pm

    Does it really surprise anyone that the famous GS has some rotten apples in their personnel. The whole performance of this hedge fund should be investigated as if they are prepared to pay – how many other structured transactions have they influenced?
    Does it also happen here – I bet it does -FSA get on the case