Goldman Sachs charged with $1bn fraud over toxic sub-prime securities Securities and exchange commission charges Goldman Sachs with conflict of interest in sub-prime mortgage asset sales
The Wall Street bank Goldman Sachs<http://www.guardian.co.uk/business/goldmansachs>, long considered a shrewd winner from the financial crisis, was slapped with potentially devastating fraud charges todayas US regulators accused the firm of fiddling investors out of more than $1bn (£640m) by wilfully mis-marketing toxic sub-prime mortgage-related securities. A 22-page lawsuit filed by the US securities and exchange commission (SEC) charged Goldman Sachs with working with a controversial US hedge fund, Paulson & Co, to structure and sell a complex package of mortgages to clients while Paulson took a "short" position betting that the very same mortgages would fail. Within minutes of the charges emerging, Goldman's shares plunged by 13% as investors feared a shattering blow to the investment bank's credibility. The SEC's accusations are levelled against the firm as a whole and against a French employee, Fabrice Tourre, 31, who is now an executive director in Goldman's London office. The allegations revolve around a collateralised debt obligation called Abacus 2007-AC1 that was created by Goldman three years ago and proved a spectacularly poor investment for clients. Within nine months, 99% of the mortgages in the package had been downgraded and investors lost more than $1bn. Paulson, in contrast, made a profit of about the same amount. Robert Khuzami, director of the SEC's enforcement division, said: "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." Goldman swiftly denied any wrongdoing, saying: "The SEC's charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation." The bank was among the few Wall Street firms to avoid significant losses on mortgages during the credit crunch<http://www.guardian.co.uk/business/credit-crunch>. But the bank has been dogged by accusations of betting against clients and its insistence on paying industry-topping bonuses to its staff has turned it into a lightening rod for public outrage over perceived greed. Tourre, the Frenchman allegedly at the centre of the scandal, was educated at the elite École Centrale Paris and at California's Stanford University. In 2007, he was a vice-president at Goldman's head office in New York, where he co-ordinated the creation of the contentious product. In a January 2007 email sent by Tourre to a friend shortly before creating Abacus, he wrote: "More and more leverage in the system, the whole building is about to collapse anytime now ... only potential survivor the fabulous Fab[rice Tourre] ... standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding the implications of all these monstruosities [sic]!!!" Losers in the deal include a Dusseldorf-based bank, IKB, which lost $150m, and the Dutch firm ABN Amro, later bought by Royal Bank of Scotland, which acted as an unwitting conduit between the parties involved. The SEC alleges Goldman stuffed the Abacus portfolio with homeloans written in states such as Arizona, California, Florida and Nevada that suffered the worst of the US housing crash. Goldman told clients that an independent firm, ACA Management, was selecting the contents. In a 178-page memo to clients, it made no mention of Paulson, which, in fact, was heavily involved in selecting the mortgages. Goldman was paid $15m by Paulson for structuring and marketing Abacus. The involvement of Paulson & Co is significant. The fund's billionaire boss, John Paulson, became a Wall Street celebrity by earning nearly $4bn in 2008 by correctly predicting that the US mortgage market would collapse. Among his lucrative "short" positions were bets that UK banks including Lloyds, Royal Bank of Scotland and HBOS would run into trouble. For Goldman, the SEC charges are a huge headache. The bank's chief executive, Lloyd Blankfein, has spent months trying to soothe public anger over Goldman's conduct. He apologised in November for the firm's involvement in "things that were clearly wrong", although he attracted derision by remarking, in an apparent joke, that the bank was doing "God's work".
