new york shock exchange
new york shock exchange

Shock Comes to Harlem 2010 041

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Goldman CEO Lloyd Blankfein
The Wall Street Journal is reporting that The SEC has sued Goldman Sachs for fraud in connection with a financial insutrument the firm developed through discussions with hedge fund Paulson & Co. (Paulson& Co. was not named as a defendant in the SEC charges).  According to the complaint, Paulson paid Goldman Sachs approximately $15 million for structuring and marketing the security — ABACUS 2007-AC1 — in early 2007. Goldman let Paulson make bets against the residential real estate market, which the hedge fund believed was going to tank.  ABACUS 2007-AC1 was a complex investment vehicle known as "synthetic collateralized debt obligation", or synthetic CDO, which provided income from a pool of corporate bonds without anyone need to actually purchase the bonds.  In laymen's terms:  (i) Paulson played a significant role in picking which subprime mortage-backed securities that would be used as the basis for ABACUS 2007-AC1, (ii) Paulson had an incentive to pick securities that would have tanked, since it was betting that the value of those securities would fall, and (iii) Goldman failed to disclose to investors Paulson’s role in the portfolio selection process or its adverse economic interests.

Peddling risky investments to the public and not fully disclosing just how toxic those investments are, dates as far back to the 1930's when John Pierpont Morgan ruled the Street.  This financial engineering was chronicled earlier on our site  For the full WSJ article, go here:  . . . stay tuned . . .


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