By now you have probably heard that the SEC has charged Goldman Sachs and one of its Vice Presidents for fraud in the structuring and marketing of a collateralized debt obligation (CDO) that was tied to the performance of underlying subprime residential backed securities. For a full description of the alleged fraud, you should read the SEC press release here. However, for the sake of sanity and simplicity, I will take a stab at describing the alleged fraud in “simple” terms.
According to the SEC, Goldman Sachs structured and marketed a CDO to investors without revealing that the third party who played a significant part in the choice of the securities, was also betting against the same securities by taking out credit default swaps with Goldman Sachs. In other words, if the SEC is to be believed, Goldman Sachs was making money off the structuring and marketing of securities while also making money off bets against the securities by the person who was selecting the securities in the first place. Confused? You probably are, but welcome to the world of the complex derivatives that caused the economic downturn in the first place.
Goldman Sachs has been in the news a lot since the beginning of the economic crisis. Most of the news has not been very flattering, with allegations of Goldman Sachs effectively controlling the US government with its network of alumni. So it came as quite a surprise to many for the SEC to take on the biggest bank on Wall Street. The question remains, however, whether this current stand of the SEC will be taken with a lion’s roar or a cat’s meow. It is too early to tell. However, if the financial regulatory bodies are to recover any semblance of authority, it is important that the SEC aggressively pursue this case. If the allegations are true, the alleged fraud was unconscionable and a strong message needs to be sent to Wall Street (and Goldman Sachs, in particular) that this type of behavior will not be permitted.
