SAN FRANCISCO (MarketWatch) -- The Securities and Exchange Commission on Friday charged Goldman Sachs Group Inc. and one of its vice presidents with defrauding investors by misstating and omitting key facts about a financial product related to subprime mortgages. 
 
 The SEC alleged in a civil lawsuit that Goldman GS, -0.89% structured and marketed a collateralized debt obligation that hinged on the performance of subprime residential-mortgage-backed securities, or RMBS. However, it failed to disclose the role that a major hedge fund, Paulson & Co., played in the portfolio selection process as well as the fact that the hedge fund had taken a short position against the CDO. See full story on Paulson & Co.'s role in the Goldman Sachs case. 
 
 "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," said Robert Khuzami, director of the SEC's division of enforcement, according to a statement. Read commentary about Goldman's 'faulty brakes' argument. 
 
 Goldman said the SEC's charges "are completely unfounded in law and fact." 
 
 "We will vigorously contest them and defend the firm and its reputation," the investment bank added in a statement. 
 
 Goldman shares were down 13% to $160.02 after the SEC unveiled its suit. See text of SEC complaint. 
 
 "Once upon a time, Wall Street firms protected clients," said Christopher Whalen, who heads the research firm Institutional Risk Analytics. "This litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another." 
 
 The SEC's suit is aimed at the heart of one of the most profitable hedge-fund trades in history. Paulson, headed by John Paulson, generated billions of dollars in profit in 2007 from bets against CDOs. Other firms also made huge gains in similar trades as the housing market imploded, triggering a global financial crisis. 
 
 "The SEC continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress," Kenneth Lench, chief of the SEC's structured and new-products unit, said. 
 
 Still, Paulson & Co. wasn't charged by the SEC because the hedge fund firm wasn't obligated to tell investors about the CDO. Read about Paulson's involvement. 
 
 Paulson & Co. paid Goldman to structure a transaction in which the hedge-fund giant could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events, the SEC alleged. 
 
 Marketing materials for the CDO known as Abacus 2007-AC1 told investors that the portfolio of residential-mortgage-backed securities underlying the CDO was selected by ACA Management LLC, a third party with expertise in analyzing credit risk in these securities. 
 
 The SEC alleged that, undisclosed in the marketing materials and unbeknownst to investors, Paulson & Co., which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio. 
 
 After participating in the portfolio selection, Paulson & Co. effectively shorted the RMBS portfolio it had helped select by entering into credit-default swaps with Goldman to buy protection on specific layers of the Abacus capital structure. 
 
 "Given that financial short interest, Paulson & Co. had an economic incentive to select RMBS that it expected to experience credit events in the near future," the SEC said. 
 
 Goldman did not disclose Paulson & Co.'s short position or its role in the collateral selection process in the term sheet, flip book, offering memorandum or other marketing materials provided to investors, the SEC said. 
 
 Investors in these securities, including German bank IKB (IKB) and Dutch financial-services company ABN Amro, now a unit of the Royal Bank of Scotland RBS, -1.78% lost more than $1 billion when the securities in the CDO turned toxic, the SEC said. 
 
 Paulson & Co. made a profit of roughly $1 billion on the trade, the regulator added. 
 
 Paulson & Co. said in a statement that it wasn't involved in selecting the collateral that went into the ABACUS CDO, in contrast to the SEC's allegations. 
 
 "ACA as collateral manager had sole authority over the selection of all collateral in the CDO," the hedge fund firm said. "While Paulson purchased credit protection from Goldman Sachs on securities issued under the ABACUS ABS CDO program, we were not involved in the marketing of any ABACUS products to any third parties." 
 
 "Paulson did not sponsor or initiate Goldman's ABACUS program, which involved at least 20 transactions other than that described in the SEC's complaint," the firm continued. "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 deal closed on April 26, 2007, and Paulson & Co. paid Goldman roughly $15 million for structuring and marketing Abacus. 
 
 By Oct. 24, 2007, 83% of the RMBS in the Abacus portfolio had been downgraded and 17% were on negative watch. By Jan. 29, 2008, 99% of the portfolio had been downgraded. 

 SEC suit against Goldman Sachs (full complaint here , and well worth reading) is explosive stuff. Essentially the SEC seems to have nailed down the kind of behavior that ProPublica was looking for in its story on the Magnetar Trade -- a hedge fund which was short mortgages, in this case Paulson, was carefully picking nuclear waste to put into synthetic CDOs, unbeknownst to the final investors in those deals." data-share-img="" data-share="twitter,facebook,linkedin,reddit,google,mail" data-share-count="false"> 
 
 The SEC suit against Goldman Sachs (full complaint here, and well worth reading) is explosive stuff. Essentially the SEC seems to have nailed down the kind of behavior that ProPublica was looking for in its story on the Magnetar Trade — a hedge fund which was short mortgages, in this case Paulson, was carefully picking nuclear waste to put into synthetic CDOs, unbeknownst to the final investors in those deals. 
 
 From the complaint: 
 
 GS&Co marketing materials for ABACUS 2007-AC1 – including the term sheet, flip book and offering memorandum for the CDO – all represented that the reference portfolio of RMBS underlying the CDO was selected by ACA Management LLC (“ACA”), a third-party with experience analyzing credit risk in RMBS. Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. (“Paulson”), with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO, played a significant role in the portfolio selection process. 
 
 It seems here that ACA was somewhere between a useful idiot and an outright victim of Goldman’s Fabrice Tourre: 
 
 Tourre also misled ACA into believing that Paulson invested approximately $200 million in the equity of ABACUS 2007-AC1 (a long position) and, accordingly, that Paulson’s interests in the collateral section process were aligned with ACA’s when in reality Paulson’s interests were sharply conflicting. 
 
 Essentially what Goldman was doing here was using the respected ACA brand name (it wouldn’t remain respected for long) in order to attract big investors like Germany’s IKB: they even said in an email that “we expect to leverage ACA’s credibility and franchise to help distribute this Transaction.” But ACA was to a large extent a front for Paulson, as is evidenced in the name of the spreadsheet where it listed the proposed contents of the CDO: 
 
 On January 22, 2007, ACA sent an email to Tourre and others at GS&Co with the subject line, “Paulson Portfolio 1-22-10.xls.” The text of the email began, “Attached please find a worksheet with 86 sub-prime mortgage positions that we would recommend taking exposure to synthetically… On February 5, 2007, Paulson sent an email to ACA, with a copy to Tourre, deleting eight RMBS recommended by ACA, leaving the rest, and stating that Tourre agreed that 92 bonds were a sufficient portfolio. On February 5, 2007, an internal ACA email asked, “Attached is the revised portfolio that Paulson would like us to commit to – all names are at the Baa2 level. The final portfolio will have between 80 and these 92 names. Are ‘we’ ok to say yes on this portfolio?” The response was, “Looks good to me.” 
 
 I think that the SEC has the right defendant here. Paulson and ACA are both culpable, but it’s Goldman which was clearly central to the plan of deceiving investors into believing that the CDO was being managed by people who wanted it to make money, when in fact it was being structured by the biggest short-seller in the entire subprime market. 
 
 And although ACA should never have been so passive in terms of accepting the names given to it by Paulson, it did reasonably believe, because it was essentially lied to by Goldman Sachs, that Paulson was in the deal to make money on the long side: 
 
 On January 10, 2007, Tourre emailed ACA a “Transaction Summary” that included a description of Paulson as the “Transaction Sponsor” and referenced a “Contemplated Capital Structure” with a “[0]% – [9]%: pre-committed first loss” as part of the Paulson deal structure. The description of this [0]% – [9]% tranche at the bottom of the capital structure was consistent with the description of an equity tranche and ACA reasonably believed it to be a reference to the equity tranche. In fact, GS&Co never intended to market to anyone a “[0]% – [9]%” first loss equity tranche in this transaction… On February 12, 2007, ACA’s Commitments Committee approved the firm’s participation in ABACUS as portfolio selection agent. The written approval memorandum described Paulson’s role as follows: “the hedge fund equity investor wanted to invest in the 0- 9% tranche of a static mezzanine ABS CDO backed 100% by subprime residential mortgage securities.” 
 
 The really crazy thing about this deal is that ACA not only managed the CDO, but also wrote the credit protection underlying most of it: 
 
 On or about May 31, 2007, ACA Capital sold protection or “wrapped” the $909 million super senior tranche of ABACUS 2007-AC1, meaning that it assumed the credit risk associated with that portion of the capital structure… ACA Capital was unaware of Paulson’s short position in the transaction. It is unlikely that ACA Capital would have written protection on the super senior tranche if it had known that Paulson, which played an influential role in selecting the reference portfolio, had taken a significant short position instead of a long equity stake. 
 
 In a sense, then, IKB and the other investors in the deal were right to think that ACA was genuinely managing this structure to make money, and believed that it was sound. After all, if it all went to zero — as it eventually did — ACA stood to lose hundreds of millions of dollars. 
 
 But what happened here was that both IKB and ACA Capital placed their trust in ACA Management. And Goldman, armed with hefty CDO management fees and sleazy lies about Paulson’s role in the transaction, turned ACA Management from a bona fide fund manager into a useful idiot who could be relied upon to buy exactly the subprime securities that Paulson wanted to short. 
 
 With this suit, the SEC has finally uncovered the real scandal behind the Abacus deals. The NYT tried, back in December, but it didn’t quite get to the nub of the story — although Paulson was mentioned in the NYT story as someone who was generally short the subprime market, there was no indication that he played any role in structuring the deals. Neither was there any mention of ACA. 
 
 The scandal here is not that Goldman was short the subprime market at the same time as marketing the Abacus deal. The scandal is that Goldman sold the contents of Abacus as being handpicked by managers at ACA when in fact it was handpicked by Paulson; and that it told ACA that Paulson had a long position in the deal when in fact he was entirely short. 
 
 Goldman Sachs has lost more than $10 billion in market capitalization today, in the wake of these revelations. Good. It can go long markets and it can go short markets. But it can’t lie to its clients. That’s well beyond the pale. 
 
 Update: The Abacus pitch book can be seen here. 

 Though stocks dropped sharply and Goldman in particular surrendered well over 10 percent in share price, the reaction on trading floors and from portfolio managers was that investors would get over the shock in short order. 
 
 "Everything we're dealing with happened a couple of years ago," said Dave Lutz, managing director of trading for Stifel Nicolaus in Baltimore. "Ultimately, once this noise has washed out, it's going to translate into one heck of a buying opportunity." 
 
 Authorities charged that Goldman, arguably the least hard-hit of major firms when the subprime industry collapsed, packaged mortgages that were secretly designed to fail. Goldman used such short-selling techniques to protect itself against the fallout from toxic mortgages. 
 
 Goldman has said it will vigorously defend itself against the charges. 
 
 Anton Schutz, portfolio manager at Burnham Financial Services, called the investigation into Goldman "a witch hunt" and politically expedient at a time when Main Street investors are increasingly suspicious of Wall Street business practices. 
 
 The prevailing sentiment was that the damage to Goldman and the financial markets would only provide opportunity. 
 
 The negative effect for Goldman Sachs will be "significant," but will be a "short-term problem" for the company, said Dick Bove, an analyst for Rochdale Securities. "Whenever the SEC issues these type of charges against a company, there's generally a long, drawn-out legal battle that will change the company's procedures. But it will be a short-term problem. For the long term, it will pass," Bove said. 
 
 The announcement also raised questions about timing, considering the struggle in Congress to get financial regulation reform passsed. 
 
 "The Goldman news today could cause the same market reaction as (President) Obama’s announcement in January that he would seek to regulate the business practices of our nation's banks," said Thomas H. Kee Jr., president and CEO of Stock Traders Daily. 
 
 "From there, the market fell hard. From here, because the technicals and fundamentals are showing resistance at the same time, a similar market decline can follow. In January, the technicals and fundamentals lined up too. More importantly though, many short sellers were lined up then, and they are lined up now. There are plenty of similarities. In January, the button was pushed by Obama. This time, it was pushed by the SEC." 
 
 The Goldman fallout may have provided the perfect opportunity for a pullback among those who think the market has become overbought after rallying nearly 80 percent in the past 13 months. 
 
 "People have been buying these (financial) names, going long, long, long. What you're seeing today is a reaction to that," said Yousef Abbasi, financial desk analyst at Execution Noble in New York. "Some folks are more than happy—they're pulling off gains on some of these names. They want to get out." 
 
 To be sure, it was not all doom and gloom in the markets. 
 
 Insurers such as American International Group and MBIA could benefit on belief that should the Goldman case be a trigger point for similar investigations and revelations, insurers would be able to recoup some losses on policies they wrote. 
 
 AIG and MBIA wrote insurance policies—called credit default swaps—against the packaged mortgages and thus had to pay off when they collapsed. If fraud is found involving CDS that the insurers underwrote, they could be in line to get their payouts back. 
 
 "If any of this is potentially true, there would be direct beneficiaries in the financial space," Abbasi said. "If the mortgages and structures are in fact fraudulent, these guys would be potentially let out of agreements or contracts with Goldman." 
 
 Indeed, the question of how systemic the problem is and whether the timing of the Goldman announcement—in the middle of the trading day rather than before or after the bell—vexed investors. 
 
 "It's not necessarily the fear for Godlman as much as it could be a ripple effect across the other financial companies," said J.J. Kinahan, chief derivatives strategist at TD Ameritrade. "As we face financial reform in the next few months, what's going to be the long-term implications on trading in general? This has a much bigger implication on the market and every single product going forward." 
 
 The announcement also came as options expire for the month, and investors who took out earlier plays on Goldman were left unable to hedge, Kinahan said. 
 
 Beyond the implications on stocks and the financials in particular, there also was the question of investor trust. 
 
 With public confidence in the market low—judging by the continued trends of light volume and far more money flowing into bonds than stocks—the Goldman charges can't help. 
 
 "It's going to take a long time," Stifel's Lutz said. "The market's going to deal with some level of investor uncertainty over this process." 

 Crawl of outlinks from wikipedia.org started March, 2016. These files are currently not publicly accessible. Properties of this collection. It has been several years since the last time we did this. For this collection, several things were done: 1. Turned off duplicate detection. This collection will be complete, as there is a good chance we will share the data, and sharing data with pointers to random other collections, is a complex problem. 2. For the first time, did all the different wikis. The original runs were just against the enwiki. This one, the seed list was built from all 865 collections.
– The SEC's civil suit against Goldman Sachs is hardly a slam-dunk, experts agree, but the scrutiny is certainly not doing the firm any good. Some reactions: This "is explosive stuff," Felix Salmon blogs for Reuters. "Goldman Sachs has lost more than $10 billion in market capitalization today, in the wake of these revelations. Good. It can go long markets and it can go short markets. But it can’t lie to its clients." Don't get carried away, Joe Weisenthal writes for Business Insider. The lawsuit isn't a blanket allegation. Goldman is "being charged for something very specific, that its employee Fabrice Tourre misled investors about who selected the assets, and what direction he was betting on." "This litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another," one analyst tells MarketWatch. "If any of this is potentially true, there would be direct beneficiaries in the financial space," another analysts tells CNBC. "If the mortgages and structures are in fact fraudulent, these guys would be potentially let out of agreements or contracts with Goldman."