More Bad News For Big Banks: Goldman Sachs Charged With Fraud

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Last night, at a fundraiser in Florida, President Obama demonstrated just how hard he plans to take it to the banks in the coming months. He compared bank lobbyists to flesh-eating fish. No joke.

Now, it’s no surprise that the financial institutions that profit from the status quo have sent hordes of lobbyists to kill reform.  It’s like throwing a piece of meat into a piranha tank — they’re going to race to see how fast they can tear it apart.  But we can’t allow them to succeed.

Day breaks with news that banks may have bigger problems. Stock in Goldman Sachs is, as I write, trading down 14 percent on news that the Securities and Exchange Commission has brought a fraud action against the company for its allegedly less than noble behavior in 2007. In brief, the charges amount to this: Goldman structured and marketed a complex derivative product, called a “synthetic CDO,” that offered clients a chance to bet on the movement of a group of subprime, residential mortgages. But Goldman did not tell its clients that the content of the CDO had been determined with the help of a large hedge fund, Paulson & Co., that had bet against its own product. In fact, Goldman allegedly led investors to believe that Paulson was betting the CDO would go up in value. This is like a friend telling you go eat at this new restaurant because it has the greatest chef, without mentioning that the chef is, at the moment, curled up on the floor of the kitchen with food poisoning.

Investors in the CDO lost over $1 billion, while Paulson & Co profited about $1 billion by betting on the CDO’s decline. Paulson paid Goldman about $15 million to market the dog of an investment. Read the complaint here.

It is notable that Goldman is not the only big bank trading sharply lower at the moment, suggesting, perhaps, that investors see more aggressive SEC enforcement as a potentially bad sign for all big banks.

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