SEC Hauls Up Goldman in Legal Suit for Stoking Flames of Foreclosure Crisis
The SEC has hauled up Goldman Sachs in a legal suit for stoking flames of foreclosure crisis. The suit alleges that one of the globe’s jumbo hedge fund Paulson & Co had given to Goldman nearly $15 million for investing in mortgage backed securities. But Paulson was aware that the value of the sub-prime mortgages was inevitably going to collapse. Paulson meanwhile had covered its risk with heavy insurance that enabled it to rake in astronomical profits. Banks in Germany were the worst sufferers enduring huge losses.
SEC is trying to get out of Goldman and its top ranking employee Fabrice Tourre compensation – the amount not being specified.
SEC was asked why it did not bring charges against Paulson, its enforcement director Robert Khuzami said, “It was Goldman that made the representations to investors. Paulson did not.”
John Paulson operates Paulson & Co and it pocketed billions from the sub-prime mortgage crisis by betting against these securities. He was one of the first ones in Wall Street to do this. His company gleaned over $15 billion in 2007 and personally he put into his pocket $3.7 billion. Since then his earnings in billions have increased mainly by betting against the stocks of banks and then purchasing them back after their shares nose dived.
Paulson & Co said in a statement, “As the SEC said at its press conference, Paulson is not the subject of this complaint, made no misrepresentations and is not the subject of any charges.”
The pools of mortgage securities were selected by ACA Management. These were named synthetic collateralized debt obligations. But SEC contends that it was Goldman that misguided the investors by not telling them about the role of Paulson & Co and that it too selected the mortgage pools and gained hugely when the value began to fall. In a statement Khuzami said, “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”
Goldman however refused to accept this line of arguments and that it was not mandatory for it to “disclose the identities of a buyer to a seller and vice versa.”
Rep. Barney Frank (Democrat/Massachusetts) who is chairing the House Financial Services Committee is happy with the action being taken. Spokesperson Steven Adamske said that Frank is “pleased that the SEC is departing from the lax enforcement of the Bush administration and is returning to the SEC’s proper role of protecting investors in the marketplace.”
