Investors Lose $1 Billion, Goldman Sachs Claims There Was No Crime

Goldman Sachs' Lloyd Blankfein

Goldman Sachs released a statement late on Friday, claiming that the charges of fraud by the Securities and Exchange Commission (SEC) are “completely unfounded in law” and that the multi-billionare investment firm “will vigorously contest them and defend the firm and its reputation.”

The SEC charged Goldman Sachs on Friday with fraud in structuring and making money off the subprime mortagage bubble by scheming a CDO known as ABACUS.

The investigation found that Goldman Sachs let one its biggest clients — John Paulson’s hedge fund, Paulson & Co., to bet against mortgage security portfolios that were bound to fail. Goldman Sachs lured investors into investing on these portfolios and when the market collapsed, Paulson made off with the $1 billion that the investors lost. (John Paulson is not related to Hank Paulson, former US Treasury Secretary.)

“The product was new and complex but the deception and conflicts are old and simple,” said Robert Khuzami, Director of the Division of Enforcement. “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.”

The SEC has placed fault on Goldman Sachs’ Vice President Fabrice Tourre who “structured the transactions,” and for misleading and keeping investors in the dark. Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing ABACUS.

The SEC is continuing its investigation and litigation against Goldman Sachs will likely be unavoidable.

Goldman Sachs received $10 billion from the financial bailout or TARP in 2008 at a zero percent interest rate. Earlier this year, junior bankers at the investment firm received a 50 percent salary increase and some $16 billion in company bonuses were distributed to top management.


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