If you haven't yet read up on the SEC filing against Goldman Sachs, visit Felix Salmon's blog. Brilliant stuff.
A shorter version for our regular readers: You may remember Goldman Sachs, star of popular public relations moments such as The Great Vampire Squid And You, We Really Didn't Need $18b In Government Handouts (But Please Don't Check), and Doing God's Work.
Yes, they're a likeable bunch over at Wall Street. The type of people you'd like to sit down and have a drink with, so long as they were paying, and you kept an eye on your wallet, and never under any circumstance allowed them to structure a synthetic collaterallized debt obligation for you.
In their filing, the SEC accuses Goldman Sachs of being very naughty boys indeed. And it all began in the halycon days of 2007:
Back then, two companies, IKB and ACA, hired Goldman Sachs to help structure a synthetic CDO. The details are all very complicated, but it's enough to understand that a synthetic CDO uses swaps to create credit exposure on mortgage-backed securities. By assuming a long position, IKB and ACA stood to earn money if the securities gained in value.
Goldman turned to Paulson & Co. Paulson assisted ACA Management in creating the CDO - selecting the underlying securities on which it was based. Trouble is, Paulson was assuming the short position – they were betting that the CDO would decline in value. Because of that involvement, they were able to cheat. In the words of the SEC, they "identified over 100 bonds . . . expected to experience credit events in the near future."
Goldman knew this. They knew Paulson was short mortgage securities and, according to the SEC, intentionally misled their clients into thinking he was a purchaser of the equity tranche.
It's absolutely mind-blowing. Goldman raked in $15 million in fees from the deal and IKB and ACA suffered huge losses. A big deal indeed.
