WASHINGTON — The government on Friday accused Wall Street’s most powerful firm of fraud, saying Goldman Sachs & Co. sold mortgage investments without telling the buyers that the securities were crafted with input from a client who was betting on them to fail.
And fail they did. The securities cost investors close to $1 billion while helping Goldman client Paulson & Co. capitalize on the housing bust. The Goldman executive accused of shepherding the deal allegedly boasted about the “exotic trades” he created “without necessarily understanding all of the implications of those monstrosities!!!” The civil charges filed by the Securities and Exchange Commission are the government’s most significant legal action related to the mortgage meltdown that ignited the financial crisis and helped plunge the country into recession.
The news sent Goldman Sachs and other stocks reeling as the SEC said other deals related to the meltdown continue to be investigated.
The Dow Jones industrial average lost 125.91 points, closing at 11,018.66. Goldman Sachs shares fell 12.8 percent to close at $160.70, off $23.57.
It was a blow to the reputation of a giant that had emerged relatively unscathed from the economic crisis.
Goldman Sachs denied the allegations. In a statement, it called the SEC’s charges “completely unfounded in law and fact.”
The SEC said Paulson paid Goldman roughly $15 million in 2007 to devise an investment tied to mortgage-related securities that the hedge fund viewed as likely to decline in value. Separately, Paulson took out a form of insurance that allowed it to make a huge profit when those securities’ value plunged.
The fraud allegations focus on how Goldman sold the securities.
Goldman told investors that a third party, ACA Management LLC, had selected the pools of subprime mortgages it used to create the securities. The securities are known as synthetic collateralized debt obligations.
The SEC alleges that Goldman misled investors by failing to disclose that Paulson & Co. also played a role in selecting the mortgage pools and stood to profit from their decline in value.
“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,” SEC enforcement director Robert Khuzami said.
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