A volcanic cloud over Wall Street
The charges against Goldman could have far wider consequences
IS THE most powerful and controversial firm on Wall Street about to get the comeuppance that so many think it deserves? On Friday April 16th America’s Securities and Exchange Commission (SEC) filed civil charges against Goldman Sachs and one of its vice-presidents, Fabrice Tourre, for allegedly defrauding investors by failing to disclose vital information about a financial product linked to subprime mortgages, as America’s housing market was starting to wobble. Goldman’s shares tumbled, dragging down stockmarkets.
The instrument in question, structured and marketed by Goldman, was a synthetic collateralised debt obligation (CDO), whose performance was tied to that of residential mortgage-backed securities. Goldman told its investors, who included some European banks, that the securities bundled together to form the CDO had been selected by an independent third party, ACA Management. The SEC alleges that the investment bank failed to disclose that another firm, Paulson & Co, a big hedge-fund manager, had in fact had a hand in choosing what went into the CDO.
