The Securities and Exchange Commission is taking action against Goldman Sachs for misrepresenting securities the bank created and sold to investors. The suit (.pdf) is civil, so you won't see any bankers in orange jumpsuits here, but it is significant. The action marks the first time the SEC has accused a major Wall Street bank of fraud involving securities related to the housing bubble. Does the SEC have a case or is this just a feel-good political move on the part of the regulator? That depends on the evidence it has accumulated.
Here's the New York Times' report of the facts:
According to the complaint, Goldman created Abacus 2007-AC1 in February 2007, at the request of John A. Paulson, a prominent hedge fund manager who earned an estimated $3.7 billion in 2007 by correctly wagering that the housing bubble would burst.
Goldman let Mr. Paulson select mortgage bonds that he wanted to bet against -- the ones he believed were most likely to lose value -- and packaged those bonds into Abacus 2007-AC1, according to the S.E.C. complaint. Goldman then sold the Abacus deal to investors like foreign banks, pension funds, insurance companies and other hedge funds.
But the deck was stacked against the Abacus investors, the complaint contends, because the investment was filled with bonds chosen by Mr. Paulson as likely to default. Goldman told investors in Abacus marketing materials reviewed by The Times that the bonds would be chosen by an independent manager.
The idea is that Goldman structured securities that were designed by an interested manager to go bad, but didn't represent them that way to investors. If the facts of the case are proven to be accurate as depicted above, then it should be very easy for the SEC to prove fraud. Cherry picking bad assets and selling them to investors who thought they were chosen by an "independent manager" is illegal.